The Long Road to Recovery That Lies Ahead for India’s Economy

Livemint     21st August 2020     Save    

Context: Loose monetary and fiscal policies can’t be sustained for long, and we need comprehensive structural reforms to drive growth.

Challenges to the Economy:

  • Rising Fiscal Deficit: The total public- sector borrowing requirement, including the borrowings of public undertakings, will be around 14-15% of GDP.
  • Declined Growth Projections: Estimates of the gross domestic product (GDP) decline in 2020-21 vary from 1% to over 15%.
  • Stagflation: Along with a sharp decline in GDP, headline inflation has risen to almost 7%, well above the Reserve Bank of India’s (RBI’s) tolerance band, and food inflation is close to 10%.
  • Temporary Current Account Surplus: The country’s current account balance had temporarily turned into a surplus because, along with low oil prices, declining GDP had led to a sharp decline in imports.
    • However, as the recovery proceeds, imports will rise, leading again to a trade deficit and a negative net impact on aggregate demand.
  • Geopolitical Tensions: The external environment is also unlikely to stimulate high growth without a strong reversal of the pandemic-led global recession and continuing geopolitical tensions.

Way Forward: Structural Reforms

  • Economic Reforms: 
      • Financial Sector: 
        • Bringing public sector banks under the exclusive regulation of RBI.
        • Reducing public ownership to less than 50% is necessary.
        • Strengthening the supervision of both banks and non-bank finance companies.
  • Fiscal Reforms:
        • A reduction in tax concessions and exemptions.
        • a policy reversal on discretionary ad hoc tariffs, 
        • elimination of non- merit subsidies
        • A progressive shifting of central and state government expenditure towards education, health and physical infrastructure.
  • Power Sector: 
        • The core reform required is the privatization of distribution.
        • The experience of states like Delhi can serve as templates for others.
      • Abolish Regulation de-incentivizing growth: of small and medium enterprises, such as the Factories Act.
  • Public Sector Enterprises Reform:
      • Create a win-win situation where the firms can compete fairly without needing taxpayer’s money.
    • Agricultural Reforms: Reform the marketing system to narrow the huge margins between what consumers pay and farmers earn.
  • Strengthen Governance: through maintaining the quality of governance institutions – the legislature, judiciary and executive.

Conclusion: Past experience in China, India and elsewhere suggests that it could take up to a decade for the process to work itself out and return us to a path of high growth.