2020 will stand out in history as the year that stalled the world. Borders closed, priorities and expectations were rejigged, and the fragility of lives and livelihoods was exposed. While there has been much speculation of the shape of the recovery in India, the economy came out through the lockdown faster than expected. This was thanks to the rural economy holding up with a good monsoon, sufficient labour --- ironically from migrants returning home, and stimulus from the PM Kisan Yojana, Pradhan Mantri Garib Kalyan Package, MGNREGA etc.
As restrictions eased, manufacturing and then services perked up by Diwali. While the unemployment rate has now dropped back to pre-pandemic levels, as per CMIE data, the possibility of a stronger recovery has been dented. Demand has been hit by the severe loss in incomes over the year and uncertainty over the future. The current growth estimates by RBI show GDP shrinking 7.5 percent for the year, revised upwards from its October assessment of a 9.5 percent contraction. However, estimates should be read with caution this year and next; forecasts have become more precarious as we live through extremely uncertain times.
The pandemic has revealed deep structural divides in the economy. As J.P. Morgan Economist Sajjid Chinoy noted, the recovery appears to be led by profits, with drastic cuts in wages, a trend that will worsen wealth and income inequalities. From small businesses to households, finances have been thrown out of whack.
Data from the World Gold Council shows that Indian households have sold (that is, recycled) the highest amount of their most trusted asset, gold, in eight years!
Government finances are in trouble. RBI’s assessment of State Government Budgets estimates that their gross fiscal deficits are set to double in 2020-21. Meanwhile the union Finance Minister has gone on record saying that stimulus measures will not be constrained by a fiscal deficit target. So far, the bulk of the fiscal stimulus measures announced by the Central government (credit guarantees, higher outlays for housing, extension of the Production Linked Scheme etc.) has been oriented towards boosting investment and employment, which will help for sustainable growth in the longer run. However, calls for direct cash transfers and universal food security cannot be ignored any longer. Rather than multiple programmes and schemes targeting different segments, with a compounded error in identifying and reaching beneficiaries, it would be worthwhile to run the fiscal arithmetic and begin deliberations on the feasibility of moving to one strong comprehensive social welfare net.
It is at times of crises that foundations laid in the past show their strengths and weaknesses. So we found that the DBT (direct benefit transfers) architecture laid out through the JAM trinity (Jan Dhan-Aadhaar-Mobile) has been working quite successfully for the stimulus, though there are still many problems to be fixed at the last mile like internet connectivity and stability, and identification of beneficiaries. There are more than 400 schemes under DBT currently; rationalisation will lead to cost savings, these should be estimated and passed on to the vulnerable segments in the country.
On the other hand, the plight of the migrant workers during the lockdown brought out the worst face of governance in India today. The focus of inclusion has so far been on the rural poor, leaving low income urban families and migrant workers largely off the policy radar. The ineffectiveness of laws and regulations was exposed, as we discovered an Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979, that has not been implemented by state governments or employers. The compliance requirements of this law are high enough to incentivise contractors and employers to collude with officials towards evasion. We can see clearly now that the mantra of “Simplify, Rationalise and Digitise” works not just for Ease of Doing Business, but also to protect the right of workers – this is the key reform that must be implemented across the board by governments at every level.
Looking ahead, economists at Nomura contend that India has moved onto the cusp of a cyclical recovery and place it among the fastest growing economies next year – but this assessment really should not bring us much comfort. While the pandemic will be behind us someday, we need to address the structural divides that are inhibiting progress towards a more equitable society, where the quality of growth will matter more to us than the rate.