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The Economic Times     24th August 2020     Save    
QEP Pocket Notes

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.

QEP Pocket Notes