Improvement in economy might slow down or even stagnate in the second quarter

Improvement in economy might slow down or even stagnate in the second quarter

Context:

The article discusses the economic impact of the pandemic and analyzes India’s approach.

Details:

- Reopening of the economy post the lockdown phase has led to some improvement in economic activity towards the latter part of the April-June quarter.

- However, there are concerns that the improvement in economic activity is unlikely to sustain. There are concerns that in the July-September quarter, the pace of economic growth would slow down or even stagnate and fall.

- CRISIL Ltd foresees a 25 percent contraction in India’s GDP in the first quarter of the current financial year, and a 5 percent contraction for the entire fiscal year. It estimates a permanent loss of 10 percent of GDP for India.

- Despite the improvements in some sectors like the grocery and pharmacy sectors, they have been below their pre-COVID levels.

Existing pressures:

- The COVID-19 pandemic struck at a time when India was growing at its slowest pace (4.2 percent in 2019-20) since the global financial crisis, lowering demand and economic activity.

- The pandemic has led to a big reduction in incomes and loss of sources of livelihood.

Lockdown approach:

- The major approach to containing the spread of COVID-19 in India has been its reliance on lockdown and social distancing.

- The longer the lockdown, the greater is the impact on livelihoods. That, in turn, necessitates income support for vulnerable households and financial support for susceptible businesses. This becomes a challenge due to the current fiscal pressure.

- Regions that have accounted for the fast spread of COVID-19 have reintroduced containment measures, which will adversely impact economic activity.

- The partial unlocking of the economy and the back and forth on containment measures will continue to pose a hindrance to supply chains, transportation and logistics.

Inadequate responses:

- The monetary measures announced after the pandemic do not have the potential to trigger an economic recovery because of the underlying issue of rising financial sector stress and lack of fiscal space.

India’s vulnerability:

- The economic recovery look will depend on the shape the COVID-19 infection curve takes.

- Given India’s high population density and weak health infrastructure, a rapid outbreak and crumbling of the system are not impossible.

India’s approach to the problem:

- Unlike most countries which have announced large fiscal stimulus to revive their economies, India has followed a calibrated approach, which does not lean much on direct fiscal spending, but emphasizes on reforms.

- There are risks to both these contrasting approaches. The effectiveness of a generous stimulus is reduced by a rise in precautionary savings among households. Further, if there is a second wave, it raises the question of whether there will be enough fiscal ammunition left.

- The risk with India’s approach is that too little a stimulus can hurt the productive capacity of the economy and complicate the recovery process.

Conclusion:

- An interesting aspect of the government’s economic package has been the emphasis on economic reforms, particularly in agriculture and mining.

- This would, by helping improve medium-term growth prospects over time, also help control the rise in the debt-to-GDP ratio and make it easier for the government to consider a fiscal push.

- These reforms need to be relentlessly pursued, complemented by other reforms to improve the business environment.