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EFSAS Commentary

One of the prime contributors to India’s global standing, its COVID-dented economy needs careful nurturing


The highly disruptive COVID-19 pandemic has taken a heavy toll on economies across the world, with even behemoths like the United States (US) succumbing to its broad, and indeed deep, sweep. Distinct slowdowns in economic growth and rising unemployment have been the worldwide trend over the past year, and India’s experience during this period has been no different. Practically every sector of the Indian economy has been adversely affected as domestic demand, consumption, manufacturing, exports and capital flows, the legs on which the economy had been growing, have plummeted. Simply put, this has been India’s biggest economic crisis in modern times. The scale of the disruption that the pandemic has caused has meant that the current downturn needs to be viewed as fundamentally different from earlier recessions, and one that is likely to alter the business landscape.

So devastating has been the economic impact of the pandemic that despite India’s latest economic data showing signs of a tentative recovery and the United Nations (UN) and the International Monetary Fund (IMF), among others, forecasting a more optimistic outlook looking ahead, India’s battered economy will without any doubt require robust and concerted government support to sustain and propel this growth momentum for quite some time to come. Such support needs perforce to be guided purely by economic principles without being clouded by political expediency, as has sometimes been the case in South Asia. India should also bear in mind that the direction its economic recovery takes in the months and years ahead will leave a clear imprint on what the country’s stature in the international arena looks like.  

The upcoming Budget for 2021-22 that will be presented on 1 February by India’s Finance Minister Nirmala Sitharaman will provide important clues on the direction in which the government’s economic response is headed. While it is expected that the priorities of this year’s budget will be different, especially important will be the attention that is paid to reversing India’s contracted Gross Domestic Product (GDP) and revenue, to creating demand for jobs, especially in the rural sector, and to addressing the challenges to the country’s health infrastructure.

It is, of course, worth noting that India’s real GDP was on a downward slope much before the COVID-19 pandemic hit the country. Growth had moderated from 7% in 2017-18 to 6.1% in 2018-19, and further to 4.2% in 2019-20. COVID-19 has worsened this situation, which in turn affected the revenue receipts of the country. India’s GDP in the April-June 2020 quarter was 23.9% below its 2019 level, indicating that nearly a quarter of the country’s economic activity had been wiped out by the drying up of global demand and the collapse of domestic demand that accompanied the series of strict national lockdowns. A 7.5% decline in GDP in the following quarter then pushed India’s economy into an unprecedented recession. Consequently, demand became weaker, government receipts were further down, and the employment situation became grimmer.

Micro and small enterprises, which employ about 110 million workers and contribute 30% of the India’s GDP, were hit hard. More than a third of small and medium enterprises surveyed in June 2020 by the All India Manufacturers’ Organization said that their businesses, which did not have large reserves of capital to fall back on, were beyond rescuing. In an economy that relies heavily on consumer demand to drive growth, with private consumption accounting for three-fifths of the Indian economy, the financial health and recovery of these small enterprises were critical to a large proportion of Indian livelihoods. Consumer confidence, meanwhile, sank to record depths, registering 49.9 on the Reserve Bank of India’s monthly survey index in September 2020 – the lowest ever.

The informal sector, which constitutes a large section of the Indian economy, has been the worst affected. In India, informal firms dominate the micro and small-business landscape and many of them have no financial footprint. The Indian government had unrolled a collateral-free credit scheme worth around $42 billion to support cash-strapped Micro, Small and Medium Enterprises (MSMEs). According to government figures, about $20 billion of this had reached businesses by November 2020. However, business owners operating in the informal economy – such as street vendors who have not registered with authorities – are not eligible for the loan scheme. The fear of plunging deeper into debt in these already harsh economic times may also have restrained many from taking up the government’s offer of credit. As Amit Bhardwaj, secretary-general of the Federation of Indian Micro Small and Medium Enterprises (FISME) explained to Al Jazeera, “In a pandemic situation when the future is very uncertain, many MSMEs are thinking: why would I want to take on additional liabilities?”

Just like the MSMEs, India’s aviation and hospitality, travel and tourism, fashion and lifestyle, and auto industries have all been facing their own set of problems. The Indian government has been criticized by some analysts for its tepid fiscal response to this widespread crisis. They estimated the amount of the government’s package to actually be about 1% of the GDP rather than the claimed 10% of the GDP. However, as the Indian government’s debt already stood at 68% of the GDP when COVID-19 sneaked in from China, and with revenue collection on a declining curve, the options before the government were limited.

India had already been struggling to provide enough jobs for its huge population, and millions more have been lost since the pandemic hit. While millions in the formal economy have lost their jobs, the quantum of those rendered jobless in the informal economy has not been recorded and its true impact is, therefore, difficult to assess. Some experts have, however, estimated that some 80 million people in the informal economy of India could have become unemployed during the pandemic. To add to their woes, inflation has been at uncomfortably high levels till recently, bringing household incomes under severe stress.

An Oxfam report titled ‘The Inequality Virus’ recently examined how the COVID-19 pandemic had exposed the stark inequalities that existed between the rich and the poor in almost every country of the world. On India, the report highlighted that the country’s top 100 billionaires had seen their fortune go up by as much as 35% since March 2020, at the same time that the less fortunate sections of the population were losing their jobs in droves. As Oxfam India CEO Amitabh Behar summarized, “The report shows how the rigged economic system is enabling a super rich elite to amass wealth in the middle of the worst recession and the biggest economic crisis in the history of independent India while billions of people are struggling to make ends meet. It reveals how the pandemic is deepening long standing economic, caste, ethnic, and gender divides. While the Coronavirus was being touted as a great equaliser in the beginning, it laid bare the stark inequalities inherent in the society soon after the lockdown was imposed”.

The Oxfam report also brought the gender inequalities to the fore. It stated that women in India bore the burden of the negative impacts of the lockdown, with 17 million women losing their jobs in April alone, and the unemployment level rising from an overall 18% to nearly 33% for Indian women. The report added that “This increase in unemployment of women can result in a loss to India's GDP of about 8% or USD 218 billion”. It also underlined that the pandemic had a disproportionate impact on the health and education of the poor. While such inequalities are present globally, with the world’s 500 richest seeing their wealth increase by $809 billion since January 2020 even as over a 100 million people worldwide were pushed under the poverty line, India would do well to prioritize creating safety nets for the most vulnerable sections of its own society.

The New Year has, amidst this general aura of gloom, heralded better tidings for the Indian economy. The roll-out of India’s mass vaccination program has commenced and is proceeding at pace, and the country’s massive vaccine production capacities have emerged as a critical cog in the effort towards global vaccination. Meanwhile, suggesting that the worst for the Indian economy may well be behind it, projections by reputed international organizations released over the past fortnight have painted an optimistic picture.

The United Nations Department of Economic and Social Affairs (UN DESA) in its projection titled ‘The World Economic Situation and Prospects 2021’ assessed that the Indian economy would contract by 9.6% in the calendar year 2020 “as lockdowns and other containment efforts slashed domestic consumption without halting the spread of the disease, despite drastic fiscal and monetary stimulus”. The projection, however, added that India’s economic growth would rise to 7.3% in 2021, making it the fastest growing major economy, with China coming in a close second with a 7.2% projected growth rate in calendar year 2021.

Earlier this month, the World Bank had also forecast India’s economy to contract by 9.6% during the financial year 2020-21 but recover by 5.4% in the next financial year if wide vaccination against COVID-19 was successfully carried out and the disease was contained.

The International Monetary Fund’s (IMF) latest World Economic Outlook Update that was released earlier this week underlined that India’s rebound after the pandemic-induced lockdown had just begun, and that it would continue beyond 2021. The IMF projected an impressive 11.5% growth for India in 2021, adding that the country would be the only major economy of the world that will register a double-digit growth this year. China will grow at 8.1% in 2021, followed by Spain (5.9%) and France (5.5%). The IMF added that India will again grow by 6.8% in 2022 and China by 5.6%. IMF managing director Kristalina Georgieva had recently said that “India has taken very decisive action, very decisive steps to deal with the pandemic and to deal with the economic consequences of it”.

Writing in The Economic Times, Poonam Gupta and Dhruv Sharma had argued that “There is nothing, however, that seems permanently broken in India’s growth model to warrant pessimism. Many of the deep-rooted structural factors that helped fuel the economy’s sustained growth during the past decades seem intact: demography, a large and diversified economy, still low-income levels that signify the potential to grow, a dynamic entrepreneurial class, political and geopolitical stability, a strong institutional base and credible policy frameworks”. The authors, however, did suggest the need for continued policy attention on reforms that spur private investment, increase the economy’s competitiveness, promote greater integration into the global economy, and ensure an efficient financial sector, if India wished to revert to the growth path of the past.

Even if things are presently looking up, Indian policymakers would do well to focus more on the policy measures that need to be taken and implemented to ensure a stable and sustained recovery. As the UN’s Chief Economist Elliot Harris has aptly warned, “The depth and severity of the unprecedented crisis foreshadows a slow and painful recovery”. The Dutch banking giant Rabobank in its ‘India Economic Outlook 2021’ released on 21 January underlined that the Indian government continues to face several structural challenges that need addressing. These structural issues include the health of the financial sector, the government’s balance sheet, unemployment and deteriorating household savings. Further, inflation has emerged as a bugbear for policy makers in India. This is, despite the positive projections, not a time for sighs of relief from those involved in shepherding India’s economy; quite the opposite it is a time for doubling down and acting decisively. As the aforementioned UN DESA report has importantly suggested, India also needs to make serious efforts to improve social protection to mitigate the impact of the pandemic on the poor.

It is pertinent for Indian policymakers to not lose sight of the fact that the steady rise of India’s economic strength since the 1990s had played an indispensible and decisive role in transforming the country’s positioning on the global stage from that of a principled and responsible actor and a vocal champion of the rights of the developing world to a serious player in the big league, one which aspired to and had the conviction to demand a seat at the table with the big players. A robust economic revival that carries along and assimilates the vulnerable sections of the Indian population would undoubtedly add a lot more weight to India’s voice on the global stage and propel its stature to much greater heights. An uninspired, ineffective or careless response to the challenges at hand could equally result in just the opposite.

In the final analysis, any challenge is also an opportunity, and in the coming months and years the dexterity, seriousness and fortitude with which India approaches its economic recovery from the pandemic will tell us which of the two India chose to see.