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Seven challenges before the Indian economy fully recovers

The challenges before the government are multi-fold, and so are the opportunities. A successful resolution of these could trigger a virtuous cycle of growth, and catapult the economy to the higher orbit 

September 16, 2021 / 11:51 AM IST
Representative Image

Representative Image

The latest available macro data indicates that the Indian economy may be standing at an inflection point. It may have survived a major accident in the form of COVID-19; scraping through with couple of broken bones and some bruises. The economy has recuperated well, and is ready for discharge from the hospital. The bill to be paid would mostly be known in the next six months. For the next few quarters the economy may still need to use the crutches of government spending, before it could walk on its own.

The challenges before the government are, however, multi-fold; so are the opportunities. A successful resolution of challenges could trigger a virtuous cycle of growth, and catapult the economy to the higher orbit. A failure could though bring a disaster of unfathomable proportion.

First, the broken bones (the MSME sector and unorganised labour) need to be strengthened. A segment of the MSME has been weakening since demonetisation in November 2016. Implementation of the GST from July 2017 was another setback. The pandemic was yet another major blow to this segment, and they may have lost market share to the larger organised players.

The changing consumer behaviour in favour of digital platforms also seems to have impacted the segment. Broken supply chains and tighter credit norms have also presented challenges. Unorganised labour faced large-scale displacement due to the pandemic, especially during the initial lockdown in 2020. Many have since returned to their previous places of work, but the challenges remain. Due to a variety of reasons not all of them have got work.

Second, to swiftly recoup the deficit of two years, the drivers for the acceleration of the growth need to be identified and applied.

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Third, merely achieving a full ‘V’ recovery to the pre-pandemic level of economic activity will be inadequate, because prior to the pandemic the economy was slowing for many years, and was unable to generate adequate jobs for the burgeoning youth population. The government will need to apply multiple accelerators for sustainable growth to reach to the target of 8-plus percent.

Fourth, COVID-19 has further widened the income and wealth inequalities in society. Disparities in access to digital infrastructure have amplified the divide in social sectors such as healthcare and education. The gap between organised and unorganised sectors has also enlarged.

To maintain societal harmony and peace, the gulfs need to be managed. Of course there is no credible precedent to show that these gulfs could be narrowed materially. Nonetheless, by building strong bridges (opportunities and access) between the two sides which allow the underprivileged to freely cross over to the other side, a positive momentum could be created.

Fifth, central banks across the world adopted ultra-loose monetary policies to mitigate the damage caused by the pandemic. These need to be reversed at some point in time. There are sign that abundance of cheap money floating around combined with persistent logistic constraints, and pent up demand is leading the prices to move beyond the tolerance limits of various economies. Most central bankers have promised the reversal of monetary stimulus to be orderly; but short term disruptions cannot be ruled out. The Indian government needs to create enough cushion for mitigating the adverse impact of these likely disruptions. These disruptions might particularly impact (imported) inflation, Rupee and bond yield due to abrupt outflows.

Sixth, while the world continues to recuperate from the pandemic, the geopolitical standoff in Asia is worsening with Afghanistan becoming a symbolic battlefield between the United States and China (supported by Russia). The worries for India at the northern and north-eastern borders have risen materially, particularly with Pakistan-supported Taliban taking control of Afghanistan.

Seventh, the erratic monsoon and continued supply chain issues mean that the prices of essential commodities (most notably onion) could rise materially in the forthcoming festival season. As the run-up to the campaigns for elections in the key states of Uttar Pradesh and Punjab (and three others) will start around Diwali, keeping food prices under control would be a challenge for the government.

The path of economic recovery will not be easy. It contains lots of challenges which the government will have to tackle to put India in the higher growth orbit.

Vijay Kumar Gaba is Director, Equal India Foundation.

Views are personal and do not represent the stand of this publication.
Vijay Kumar Gaba is Director, Equal India Foundation.
first published: Sep 16, 2021 11:51 am
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