Emerging From the Abyss

CONTEXT: As the National Statistical Office (NSO) announced that GDP in the April-June period had shrunk by 24%, a much deeper hit to Indian economy this fiscal appears certain now.

Theory of Recovery: The Plucking Model by Milton Friedman 

• It compares an economy to a string instrument — while recessions pluck the string down, it bounces back thereafter. 

• This has been used to explain the economic recovery in parts of Europe post the global financial crisis.

Short-term Apprehensions: 

• High-frequency Economic Indicators: till August-end show a recovery vis-à-vis 1st quarter, though still in contractionary phase.
• Misleading Sharp Recovery: Owing to a very weak base effect - 
• The economy will suffer a permanent loss of 13% of GDP which works out to Rs 30 lakh crore in nominal terms.

• Vaccine availability: till the vaccine is found and mass distributed the things will be dominated by “Radical Uncertainty” 

• Radical Uncertainty: A situation in which we know something but not enough to act with confidence; and that too when the stakes are high. The term has been coined by John Kay and Mervin King in their recent book.

• Sharp recovery misleading, owing to a very weak base effect.

• Manufacturing V/s Services Sector:  The manufacturing sector is likely to recover faster than services because of 

• Social distancing norms: restricting face-to-face contact (tourism, hospitality, and sports).

• Restrained by regulatory restrictions.

• Persistence of risk-averse behaviour of consumers till a vaccine is mass distributed. 

• For E.g. Demand for services is tepid in China even after opening up. This is also reflected in India’s manufacturing PMI rising faster than services in August. 

• Rural Advantages and Challenges

•  Advantages:

• A normal agricultural performance and rural-centric approach of government has led to a somewhat stable rural economy, shown in demand for products with rural footprint.

• Challenges:

• Depressed Wages

• Lower remittances due to reverse migration.

• Spread of pandemic in rural areas is a big concern.

Challenges top Medium-Term Growth Prospects:

• Recession in Manufacturing Sector: The manufacturing sector has been in recession since Q2FY202.

• Gross value added fell from 18.1% in 2018-19 to 17.4% in 2019-20.

• Declining Investments: Likely to take a substantial hit with government’s ability and private’s ability as well as willingness to invest impaired.

• Unfavourable global environment: India’s medium-term growth trajectory will be largely influenced by domestic factors as the global environment will be less favourable.

• Trend of de-globalisation: will limit India’s opportunities to venture in global supply chain network through the route of industrialisation.

• Impact of COVID: In the post- pandemic world order, relentless pursuit of efficiency will take a back seat as other considerations such as resilience and reliability take precedence.

Way Ahead:

• India requires fast-tracking reforms: to improve the investment climate and attract investments, to capture the shrinking global pie of trade.
• Raise spending: to support vulnerable households and Micro and Small Enterprises (MSMEs) and the services that have been debilitated.

• This will strengthen the recovery process and may also help contain the damage to the productive capacity of the economy.