Recovery: A Long Hard Road

Context: While the recent estimates by the National Statistical Office have revealed a decline of 24% in the Gross Domestic Product (in Q1), there are several reasons suggesting slow and halted future economic recovery.

Reasons for Slow Economic recovery: as against the expected V-shaped recovery:

• Slow Supply Chain recovery: It needs to be noted that the blow to the economy has come from the supply side disruptions caused by strict lockdown.

• Partial and Localized Lockdown: imposed by the state governments re-disrupts supply chains.

• The misdirected clamour for demand stimulus: While the financial relief to the poor remains the priority, importance should be given to tackling supply-side challenges. 

• The collapse of Revenue and Fiscal parameters:

• High Fiscal Deficit: The combined deficit of the Centre and states, would probably have been about 8% of GDP (with the Centre accounting for 5%) in 2020-21.
• High debt-GDP ratio: an expected rise in the figure to up to 85-90% of the GDP, which is unsustainable. 

• Risk Aversion: 

• For enterprises, risk-mitigating precautions (often mandated ones) pose additional costs, reducing supply response.
• Consumers, especially older, richer ones, are avoiding consumption transactions involving close contact.

• Stressed financial sector: 

• Regulatory forbearance by the RBI and borrower-friendly court judgments threaten the viability of commercial banks and Non-Banking Financial Companies and the safety of depositors’ savings.
• This naturally damps the flow of new loans and advances and may do so increasingly.

• Abandoned external opportunities: By keeping itself out of the Regional Comprehensive Economic Partnership, India has lost the opportunity to benefit from dynamic and fast recovering East and Southeast Asia.