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Context: Covid-19 infection rates have moderated, but at the cost mobility. 

Pandemic and Global Growth Recovery

• The overall GDP growth will remain below its pre-pandemic path even by end-2021.

• Global GDP is expected to be 4.5 percentage points lower.
•  China is the only country where growth is expected to be positive in 2020.
• India’s stark under-performance is likely to be shared by countries like Brazil and Mexico.
• India’s GDP will reach about 10% points below its pre-pandemic path by end-2021.

Reasons behind India’s Under-Performance

• Initial conditions, and the policy response: even before the pandemic, growth had slowed to 4% from an average of 8% over 2013-16. 
• Export growth slowed due to contraction in supply chains in the absence of any major technological breakthrough.
• Reduction in the demand for goods produced by emerging markets due to ageing of the developed market population.
• Fall in private consumption with incomes falling, and easy credit coming to an end due to the rise in bad debts among banks and non-banks.
• Baggage of Fiscal Prudence: Past large borrowing and deficits are holding back the government, and the weak pre-pandemic health of the financial system is restricted RBI’s role in solving the financial crisis.

Analysis of Recent Financial and Emerging Market (EM) Crisis

• Pandemic induced Unprecedented Crisis: Typically, EM crises have been created by loose macroeconomic policies overheating the economy.
• Instead, this is an economic shock brought on by the failure of the public health system that could turn into a financial crisis if damaged balance sheets are not allowed to repair.
• Balance sheets will be damaged not because of prior excesses, but because of the collapse in incomes during the pandemic.

Way Forward

• Provide income support to households and firms to provide the needed time and space for the recovery to take hold and repair the damage. 
• Pandemic can easily turn into a financial crisis delaying the recovery and hurting even medium-term growth.
• Reserve Bank of India’s measures must be in consonance with the size of the economic shock: like measures related to liquidity, interest rates, ease regulations and fund the deficit. 
• Let the deficit rise to accommodate the decline in revenue and provide adequate income support while committing to strong fiscal consolidation 

Conclusion: Improved public health must break the link between infection and mobility, and must pave the way for economic recovery.