How the economy fared: the masses felt the worst of Covid-19
The Indian economy was battling a crisis even before the Covid-19 pandemic derailed it. Gross domestic product (GDP) growth has been falling for the past three years. From a peak of 8.26% in 2016-17, GDP growth slowed to 4.18% in 2019-20. To make matters worse, there were doubts about the veracity of the official GDP data, and when Arvind Subramanian, chief economic adviser in the first term of the Narendra Modi government, argued that the figures were overstated, the credibility crisis grew much larger. . That the government itself stopped publishing an employment report until the 2019 elections and scrapped a consumer survey after the findings were leaked to the media further muddied the waters. So, Covid-19 hit.
In August 2020, when the GDP estimates for the quarter ending in June were released, this all happened behind the scenes and for a valid reason. Thanks to a hard 68-day lockdown across the country that began on March 25, India’s GDP contracted a massive 24%. Since then, there has been a sequential recovery, with the September contraction slowing to 7.5%, but the Reserve Bank of India (RBI) expects the economy to contract 7.5% in the current fiscal year. Public discourse has suddenly gone from high growth to mere growth. The RBI’s Monetary Policy Committee’s projections for 0.1% and 0.7% economic growth in the quarters ending December 2020 and March 2021 have been enthusiastically received.
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That the Indian economy is experiencing a sequential (month-to-month) recovery is beyond question. Measures such as the Nomura India Business Resumption Index (NIBRI) suggest that economic activity is already very close to pre-pandemic levels. However, that is no longer the central question. In June 2021, the base effect will give an artificial boost to growth figures for at least four quarters. For example, even if the June 2021 GDP growth rate is 20%, it would mean that, in absolute terms, GDP would still be lower than in the quarter ending June 2019.
The real economic challenge for India lies beyond 2021-22. Once the favorable base effect has subsided, what will India’s growth trajectory be? It is this question that has polarized economists.
One school of thought – the government subscribes to this – is that the impact of the pandemic has unleashed what Austrian-born Harvard economist Joseph Schumpeter described as the process of creative destruction. Inefficient business and policies, which were holding back India’s growth story, have perished in the pandemic and what awaits us is a radical realignment of productive resources that will unleash hitherto unexplored tailwinds for growth. This would not have been possible if the government had not unleashed second-generation reforms in critical areas such as agriculture and labor, which its predecessors refused to implement, not because of ideological differences but because of a lack of political will and mandate. More could happen on this front, especially in divestment, and corporations may be allowed to run banks once again. There are credible and respected economists who subscribe to this.
The other school of thought, and this also has credible economists subscribing to it, believes that the impact of the pandemic will only exacerbate the crisis the economy was in previously. The pre-pandemic economic slowdown was not the result of a lack of second-generation reforms, but a lack of demand, they argue. India’s rich, while a significant number in absolute terms, are not enough to drive the country’s macroeconomic growth story. Your precautionary savings may also have increased in the wake of the pandemic. It is the poor, who spend a much larger share than they earn, sometimes even more, who matter for mass demand, and thus for growth. It is this large underclass, whose incomes were affected by policies such as demonetization and the goods and services tax, that have also suffered disproportionately during the pandemic. While the policy response offered them subsistence-level support through higher allocations in the rural employment guarantee scheme and free rations, it has not done much to provide what economists call a countercyclical fiscal boost. On the contrary, the reforms, which are considered revolutionary, could unleash a new income restriction in this lower class. In the name of getting rid of local middlemen, farmers may be exposed to corporate buyers with far greater bargaining power than before. Labor reforms could have removed even basic protections in the workplace. The current recovery is more likely to be driven by earnings than wages, economists tell us. This also means that it has a much smaller base. The headwinds of the pandemic for mass demand could create a vicious cycle and halt growth.
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Both arguments have their merits and their defenders. The debate is unlikely to be resolved anytime soon. And interestingly enough, there are enough data points to support both arguments. If high-frequency indicators support one, consumer confidence surveys support the other. And we will not have soon, the complete employment and consumption expenditure data (the best proxy for income data in India) that are indispensable for this debate to be resolved one way or another.
This is exactly why the state of politics should be followed as closely as the economy. In Narendra Modi, the Bharatiya Janata Party (BJP) has a leader whose popular appeal has not been equaled by any Indian politician in decades. While there is a clear Hindutva ideological component to Modi’s popularity, it is also based on a simultaneous process of delivering centralized welfare benefits to large numbers of poor people. The ability to continue to deliver on this front depends on budgetary resources, themselves a function of overall economic growth. While measures such as demonetization and GST implementation in Modi’s first term were described as a surgical attack on the corrupt, current second-generation reforms are being sold as revenue-boosting changes (not asset holdings such as toilets). , houses or kitchen). gas cylinders) of the poor. That is why the only thing that can be said with certainty at this point is that the jury evaluating the performance of the economy is likely to go beyond economists and expand to include the general public.
Limited ability to absorb the impact of Covid-19 due to the recession
The Indian economy was in a severe recession even before the Covid-19 pandemic hit the country. The growth of the Gross Domestic Product (GDP) fell from 8.3% in 2016-17 to just 4.2% in 2019-20. The slowdown occurred in the context of two major political upheavals in the economy: demonetization in November 2016 and the implementation of the goods and services tax in July 2017. As both public revenue and corporate health were affected Due to the prolonged slowdown, the ability of the Indian economy to absorb the impact of Covid-19 was already limited.
Among the world’s major economies, one of the most affected
India has been among the hardest hit by the economic impact of Covid-19. According to the IMF’s World Economic Outlook released in October, India’s GDP is expected to contract 10.3% this year. This is a much larger contraction than expected for most of the world’s major economies. While economic growth is expected to rise sharply to 8.8% in the next fiscal year, this is more a reflection of the base effect and GDP 2021-22 is likely to be lower than the 2019-20 level. To be sure, many other institutional and private forecasters have projected a minor contraction. For example, the Reserve Bank of India has projected a 7.5% contraction in India’s GDP this year. Even if the RBI projection turns out to be correct, the fact is that India will be among the worst performing major economies this year.
Fiscal stimulus is not a sufficient answer
India imposed one of the strictest blockades among all countries in the world on March 25. During the next 68 days, when the maximum restrictions were applied, economic activity suffered a great impact. It was mainly the lockdown that led to a collapse in GDP in the June quarter of this year, causing growth to contract by a record 23.9%. Once the restrictions were relaxed, the sequential economic recovery has been gaining momentum. Most of the high-frequency indicators, be it the Nomura India Trade Resumption Index or the Purchasing Managers Index, clearly capture this trend. While most economists agree that India has done well to deal with the impact of the pandemic on the supply side, the jury is still out on whether this sequential recovery will face headwinds on the demand side. .
Economic recovery gains momentum
While India imposed one of the toughest roadblocks to tackle the spread of the virus, the economic policy response to the pandemic, fiscally at least, has been among the weakest in the world. A large part of the economic policy response to Covid-19 has focused on credit guarantees and liquidity measures, even as calls for fiscal intervention to stimulate demand and revenue growth grew stronger. While the government announced some key pro-poor measures, such as increasing the allocation to the rural employment guarantee program and providing free rations, their overall fiscal impact was limited.