How To Take on Negative Growth

Context: The revelation that GDP has shrunk by nearly (-) 24% confirmed that the damage to the Indian economy was amongst the most severe globally. 

Reasons Behind Indian Economy’s Underperformance

• Draconian lockdown enforcement has severely disrupted the local supply chain and has resulted in the demand-supply mismatch.
• Insufficient fiscal spending/stimulus had negatively affected the consumption and investment growth
• The “survival kit” fiscal response of free food, subsidized credit and a handful of cash transfer. 
• Pre-pandemic frayed finances of corporates, banks and shadow banks.
• Consumption, investment, and exports had been decelerating since 2018. 

4 Phases Involved in Return to Economic Normalcy

• 1st Phase involves Gradual process of unlocking, with supply-chain normalization and pent-up demand resulting in faster sequential momentum. 
• 2nd Phase involves: Exiting from the lockdowns, but not from the pandemic i.e 

• Post-lockdown pent-up demand typically fades, while operations plateau below the pre-pandemic levels.
• 3rd Phase involves An exit path from the pandemic, either through the flattening of the curve, vaccines development or the development of herd immunity.
• 4th Phase involves A Post-pandemic new normal, in which potential growth settles lower.

Concerns

• Unchecked below-normal activity risks the knock-on effects on the labour market, MSMEs and banking system.
• Inadequate Monetary Policy relief: The Reserve Bank of India is cutting policy rates due to fluctuating inflation rate.
• Triggering of ‘escape clause’: ’The huge GDP growth contraction technically triggers one of the “escape clause” conditions, i.e. real output growth falling by at least 3% points below the average.

Way Forward

• Ensure fiscal support measures like cash transfers and public employment programmes in urban areas.
• Ensure coordinated fiscal and monetary policies 
• RBI keeps long-term government bond yields low to ensure smooth financing of higher fiscal deficits.
• RBI can implement debt monetization apart from - 

• Liquidity in secondary markets and other regulatory measures to bring yields down
• Flatten the yield curve 
• Incentivize banks to buy more government paper.