How to cure an economy that is sick
India Today Editor-in-Chief talks about how the pandemic and lockdown have crippled the Indian economy, and what needs to be done to navigate this crisis, in the September 7, 2020 edition of the India Today Magazine.
When the Covid-19 pandemic hit India this summer, the government faced a tough choice: lives over livelihoods. It opted, apparently, for saving lives when it imposed a harsh, unprecedented, four-phase. lockdown lasting till May 31, the benefits of which are still being debated. Surprisingly, the richer countries are paying more attention to their economies than developing ones.
Unfortunately for us, the lockdown has now turned out to be a case of prevention being worse than the disease. India has so far lost over 60,000 people to the pandemic and seen more than 3 million infections, the third-highest count in the world, after the US and Brazil. The lockdown, however, has knocked the bottom out of the economy. By all indicators, the Indian economy has entered a recession—defined as two quarters, or six months, of sustained negative economic growth, in concert with a decline in income, sales and employment. What made matters worse was that the economy was already decelerating in seven out of eight quarters before the start of the current financial year—from 8.2 per cent in January-March 2018 to just 3.1 per cent in January-March 2020. On August 6, Reserve Bank of India (RBI) governor Shaktikanta Das said that the real GDP growth of the country “is expected to remain in the contraction zone”, and growth will be negative for fiscal 2020-21 as well. The RBI’s annual report for 2019-20 released on August 26 predicts a severe shock to consumption from the pandemic and the imposition of strict lockdowns.
The triple whammy of a lockdown, the slowdown of global trade and a decline in investment means that we are now facing economic ‘de-growth’ for the first time in four decades. The last time this happened was when an oil shock-induced balance of payments crisis and consecutive years of bad monsoons led to a downturn in 1979-80. This year, in fact, could be our worst recession since Independence. The RBI’s report doesn’t give a figure, but the IMF’s World Economic Outlook for June 2020 projected India’s expected annual growth rate for the fiscal year 2020-21 to contract to -4.5 per cent. Among economists, the general consensus on the Indian economy is a predicted contraction of anywhere between -13 and -23 per cent in the April-June quarter of the current fiscal.
India’s economy has been crippled primarily because its four engines of growth — domestic consumption, government expenditure, private investment and exports — are all sputtering. Domestic consumption has shrunk again after a brief uptick in May-June; government expenditure has suffered despite a boost in infrastructure allocation because of a cutback in spending by the states; private investment has contracted because industry sentiment is low and corporates are conserving cash instead of increasing production despite the government offering MSMEs the relief of loan moratoriums. Exports contracted for the fifth straight month in July, with the lockdown taking a toll on exports of gems and jewellery, leather, textiles, electronic goods and spices. The only glimmer of hope is the uptick in agriculture on the back of a good monsoon. But just this one engine is insufficient to pull the economy out of its deep rut because agriculture contributes only 15 per cent to the GDP.
Economic distress is being felt on multiple fronts — job losses, salary cuts and inflation caused by a significant dip in demand and lockdown disruptions in supply. Worse, the government’s Rs 20 lakh crore relief package announced this May doesn’t seem to have made much difference. The unrelenting march of Covid-19 has hit Tier 1 and 2 cities, forcing states to impose even more disruptive lockdowns. India now faces the formidable challenges of flattening the curve of the pandemic; restoring employment, especially to displaced migrants; rebuilding supply chains; repairing and reviving the stricken economy, and returning life to normalcy. Decoupling the Indian economy from a belligerent China, which moved its troops onto our borders in eastern Ladakh, is another challenge.
Our cover story, ‘The Economy is Sick’, written by Executive Editor M.G. Arun and Deputy Editor Shwweta Punj with Senior Editor Anilesh S. Mahajan, estimates how long the crisis will last and what needs to be done to navigate it. We consulted our Board of India Today Economists (BITE) for solutions to our Economic Emergency.
The consensus on our BITE is that the government’s ‘invisible hand’ now needs to become more visible, and policy-making requires a radical rethink. Not only must the State significantly step up direct income transfers, including free rations, it also needs to announce a major fiscal stimulus, support MSMEs, stoke demand and create an enabling atmosphere for private investment to come back vigorously. It needs to do this through reforms in sectors like power, telecom, infrastructure financing and by formulating a policy for coastal economic zones.
If the economy does not show an upswing, there is every danger that we will be staring at a debt bomb, with the present non-performing assets (NPAs) of banks (estimated at Rs 9-10 lakh crore) likely to nearly double. This will adversely affect the viability of banks and their capacity to extend loans and deepen the crisis. Since the government is hamstrung for funds, it must look at reducing its administrative expenditure. The spend on central government employees has gone up from Rs 67,463 crore in 2008-09 to Rs 1.94 lakh crore in 2017-18, a 187 per cent increase over nine years. This will also have the collateral benefit of reducing the red tape that stifles our many dynamic entrepreneurs. An aggressive disinvestment programme of public sector undertakings can also help shore up the government’s finances.
Time is of the essence. If the government waits to conquer the pandemic and for the recession to bottom out, it may just be too late. That alone should inspire a call to action.
(India Today Editor-in-Chief's note for the cover story, The Economy is Sick, for September 7, 2020 issue of India Today magazine)