Resilience, recovery and then revival

Much remains uncertain about the Indian economy's future path. How can we grade the government's efforts to prop it up?

This week the government’s statisticians will release their estimate of growth in gross domestic product (GDP) over the third quarter of the ongoing year. This comes after a major slump in the second quarter — a contraction of about 24 per cent driven of course by the comprehensive national lockdown imposed at the end of the first quarter of this calendar year. The consensus estimate of economists polled by Bloomberg is that GDP will shrink again, but at a much lower rate — between 8 and 9 per cent. This would reflect the fact that much activity in the economy has returned to normal, but there are still pockets of the economy where social distancing rules and other effects of the pandemic still prevent a full recovery. This argument is backed by other indicators, such as those tracking industrial production.

The story of the Indian economy since Prime Minister Narendra Modi took office in 2014 is one of multiple buffets one way or another, some of which were self-imposed and some external. The initial impetus was hugely positive — not just an increase in confidence about administrative action but also the huge windfall and moderation of inflation that was caused as a result of the long-term decline in crude oil prices that began in mid-2014. Then, two years later, the government dealt the economy — particularly small and medium businesses and the informal sector — a major blow through the ill-conceived demonetisation idea. Subsequently there was the introduction of goods and services tax, or GST, which both hit smaller businesses disproportionately at the time of its implementation, and also has been underperforming in terms of revenue for the government. And, just as India appeared to be emerging from these shocks, there came the Covid-19 pandemic.

The next print of GDP, therefore, including the small print, needs to be analysed along three different tracks: Its implications for the short, the medium and the longer term. One could think of these three tracks as being, first, about resilience at the time of the pandemic; second, about recovery once the pandemic retreats; and, third, about the India growth story’s long time revival, or the sustainability of its growth engine over the coming years.

On the first question, the short term, it is clear that although aspects of production have returned to normal, question marks remain about the strength of demand in the economy. The retail sector reported differentiated but relatively encouraging signs during the festive period prior to Diwali. Electronics did well, even as compared to last year; but in-person garments retail, for example, did worse. (E-commerce, of course, saw a big jump, of over 50 per cent.) A good monsoon has so far propped up rural demand, but again there are questions about its future trajectory, given a tight labour market and the absence of supportive wage growth. Pressure will continue to grow on the government in the lead-up to the Union Budget early next year to further support demand, even though senior officials in the Union finance ministry have rightly said that their concern is trying to ensure that any demand stimulus is both affordable and correctly timed (i.e. does not have to fight social-distancing norms). The government has so far done the right things to ensure space for resilience.

Illustration: Ajay Mohanty

The medium term is more vexed. For one, the course of the Indian economy over the next two years depends crucially on exactly how long the pandemic continues to hold sway. There has been good news on vaccines in the recent past — but the two that have announced results so far, from Pfizer and Moderna, are not really suited to Indian conditions because of both the price of each shot and the cost of storage and distribution. Indian hopes are pinned on some others, especially on the AstraZeneca/Oxford vaccine candidate, which will announce comprehensive results of its trials shortly. If anything, that news is even more impactful for analysis of the Indian economy than the GDP print, to be released on November 27. Even if all goes well with the vaccine, however, Adil Poonawalla of the Serum Institute of India, AstraZeneca’s production partner in India, continues to insist that it would take “at least two or three years for all of India’s 1.3 billion population to be covered”. Much therefore depends on how efficient and timely this rollout is, the degree to which it allows for the resumption of normal activity in sectors (such as tourism, in-person retail and hospitality) that continue to be sharply affected by the pandemic, and so on. Making recovery bets in the absence of this information is a mug’s game. It is also important, therefore, that the Union government — together with the states — rolls out timetables and mechanisms for vaccine delivery that are open, transparent and effective. This plan should begin to be discussed in public within the next couple of months if some India-specific vaccines begin to be, as planned, available as early as January or February of next year. The smoothness of the medium-term recovery of the Indian economy depends upon this transparency. It will allow consumers and households to make the right choices; for business owners to get a sense of how long they need to hold on before the resumption of normal revenue; and so on. In other words, here again the government has a chance to ensure that it is a supportive partner in recovery.

Finally, there’s the question of revival. Is there any hope that, once the pandemic is over and widespread vaccination has restored something close to normal activity, the Indian economy is in a place to return to the high growth levels — of 8 to 10 per cent, at least — that it has shown in the past and that many argued in 2014 it was set to achieve consistently? Here the government’s actions have been in different directions. First, there have been some forward-looking changes. The agricultural sector, for example, has seen some long-delayed reform. The labour codes — though very far from what is actually needed — also have the potential to improve competitiveness. This adds to the existing base of recent changes — including the Insolvency and Bankruptcy Code and the corporate tax cut — to suggest an improved platform for economic lift-off. On the other hand, however, the crucial question remains private investment and here the government’s actions continue to hurt. It has appropriated too large a proportion of household financial savings; it has failed to properly repair the banking system, which would require it to ease its grip on public sector banks; and it has made India look like an inhospitable, unsafe and overly nationalist location for foreign investment. Worst of all, it has turned protectionist, thereby cutting off India from the global markets that are the only tried-and-true incentives for investment and growth. Unless that attitude changes, the government might manage full marks on resilience and recovery, but a big zero on revival.