The VW Recovery And Beyond

Context: Changing prospects of India’s post-pandemic recovery.

Long term Covid/lockdown shock impacts

• Sluggish recovery in informal, non-agricultural sector of economy: It accounts for one-fourth of GDP and 40% of total employment, but COVID-19 has been hammered on it.
  • For most of them, recovery has been very weak in both output and employment terms, thus represents lower arm of the so-called K-shaped recovery.
• Effects of reduced income in economy: May decline aggregate consumption for several years, which would have discouraging consequences for aggregate investment.
• Record deficits in public finances: Sharp rise in government debt-to-GDP ratios, touching 90% of GDP.
  • Challenges to rise as fiscal weakness is rarely conducive to sustained, strong economic growth.
• Further risks in financial system: Covid-19 have weakened the already stressed financial system.

Growth-promoting policy initiatives undertaken by government during pandemic

• Restructured corporate taxation in September 2019: Helped company profits to swell without spurring much fresh investment.
• Major reforms of agricultural marketing and distribution has been implemented;
• Labour law reforms: Restructuring of about 30 labour laws into four codes.
• Privatisation: 2021 Budget commitment to privatise non-strategic public sector enterprises.
• Establishment of a “bad bank”, the National Asset Reconstruction Company Limited, to reduce the burden of bad loans in banking system.
• Production-Linked-Incentives (PLI) scheme launched to accelerate the growth of key manufacturing sectors and their exports.
• The ? 6-trillion National Monetisation Pipeline for public sector assets has been implemented.

Areas where reforms are lagging: Trade policy limitations such as India’s record high customs duties, withdrawal from multilateral treaties such as RCEP. This weakens our potential for stronger trade links and value chains with proximate and most dynamic regional trading hub in the world.