Economic activity picked up in India during the July-September quarter. Gross domestic product in the fiscal second quarter shrank by 7.5 percent compared with 23.9 percent contraction during April to June. While growth is expected to return in the October-December quarter due to festival season buoyancy and further lifting of restrictions, FY2020-21 could well end with economic output declining 5-10 percent. We are likely to see positive 5-10 percent growth in FY2021-22 restoring the economy to pre-COVID levels.
What gets missed out in such macro commentary is that the population would have grown as usual during this time thereby worsening per capita income. Even if nominal GDP grows at an average rate of 11.6 percent (estimated by CARE ratings as necessary to reach $5 trillion GDP in FY2026-27), it will take us till FY2035-36 to reach the current levels of per capita income enjoyed by other BRICS countries. Therefore, we need to create conditions for decades of rapid and inclusive growth.
Short term factors that have aided the partial recovery
The government’s economic relief packages have helped the economy by combining a consumption boost (cash transfers), government spending (on health, MNREGA and capex), and support for the corporate sector (credit guarantees and loan moratoriums). Green shoots in manufacturing, the sustained performance of agriculture and recent policies such as cash for LTC will help to sustain demand till the next quarter. Advance indicators of economic activity such as PMI, vehicle sales, freight, GST revenues, electricity production, non-food credit etc. are looking better even though most sectors are still operating below full capacity. The threat of infections is still there but the pandemic curve has flattened and people and businesses have learnt to live with the virus. Except for contact-intensive sectors like hospitality, travel and tourism, there is visible momentum in most other sectors.
Long term policies needed to accelerate growth
The government has to sustain spending on infrastructure without raising the deficit to unsustainable levels. Many experts have urged the government to spend significantly more without explaining how to manage the ballooning deficit that may either hurt the rupee (and increase import costs) or necessitate money printing (compromising the RBI’s independence). Therefore, it is better to combine necessary fiscal relief with structural reforms (changes in rules that help the economy but do not cost money). Like the farm reforms bill, a few more radical steps (e.g. in land, labour, banking) are needed to signal that the government would not participate in economic activity but act as a facilitator.
The pandemic has sharpened economic inequality across the globe but widening of income gaps hurts a developing country more. Social safety nets are crucial for survival as we have seen during the pandemic. The government has to enhance the cash transfer mechanism, digital literacy and financial inclusion so that, in the next crisis, cash can be quickly transferred to migrant workers and the homeless. The right to work scheme can be extended to urban areas so that a fall back option is available if the economy nosedives again.
Yet we must recognize that there are limits to how much equity can come from fiscal spending and therefore focus on increasing opportunities for people and markets. To give an example from the health sector, India has 0.78 doctors per 1000 people compared to 1.98 in China and 2.17 in Brazil. This gap cannot be met by government spending alone but by allowing the private sector to set up more medical colleges while the government works on regulation. Similarly, the government must step out from telecom, airlines, energy, hotels and devote its energy to encouraging investments, framing clear rules and setting up single window system for approvals. The government must restore the IBC once the economy recovers and increase the use of digitisation in its service delivery to reduce personal interactions. In spite of the improvements in India’s ease of doing business rank, according to the World Bank, the average time required to get an electricity connection in India is 53 days, to register property is 58 days and to enforce a contract is 1445 days. It is hard to compete with other economies in the region unless India offers a more conducive environment for business.
Finally, our experience over the past decades has been that sectoral economic policies create discretion and lobbying (as seen from agriculture to airlines). Policies like the production linked incentives scheme can elicit some success but will distort price signals. It is better to focus on improving general competitiveness of the industry than give sectoral subsidies. The NITI Aayog can help by devising a national economic strategy (not plan) which will provide the road map for converting the entire country into a special economic zone instead of tinkering with select sectors.
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