Potential long-term economic consequences of the pandemic

Livemint     16th July 2021     Save    

Context: Likely hysteresis and a closing demographic window make a case for wide-ranging reforms to sustain high economic growth.

Long-term economic consequences of the pandemic

  • Misleading prospects Prospects of V-shaped growth recovery: Such curves simply reflect the ‘bowstring’ effect of a negative shock.
    • Most forecasts have suggested that the Indian economy will grow by 8% to 10% during 2021-22.
    • This implies the economy will be more or less back to the level where it was in 2019-20, about Rs 146-149 trillion at constant (2011-12) prices. That is, two years have been lost to the pandemic.
  • Long term hysteresis effects: Even assuming an optimistic scenario, that is, a growth of 10% this year and high growth of 7% for the years thereafter mean India can catch up with ‘no pandemic’ growth only by 2029-30.
  • Narrowing demographic dividend window: As 2 years are evidently lost, our low demographic dependency ratio will bottom out.

Way forward

  • Revamp measures to leverage demographic dividend: Facilitate a complete reform of our dysfunctional basic education system to improve learning outcomes.
    • Bring effective skilling program: That will enable secondary school graduates to acquire skills that can make them employable.
  • Need of wide-ranging reforms to sustain 7% growth: 
    • Health sector reforms: Complete overhaul of network of primary health centres, which is base of the public healthcare system.
    • Financial sector reforms: As regulatory forbearance by RBI on account of covid further deteriorated gross non-performing assets (GNPA) ratio. Financial Stability Report (FSR) points out, GNPA ratio is likely to rise to 10% by March 2022.
    • Power sector reforms: Addressing gaps in the distribution system in states and facilitating long journey of transformation from high-carbon fossil fuels to renewable energy.
    • Reforms in trade policy: Discretionary tariff hikes and other protectionist trade policy measures needs reversal if the country wishes to successfully compete in global markets.