Context: India needs deep regulatory reforms in labour & land markets and large-scale low-tech manufacturing to mitigate the mess of the pandemic.
Widespread impact of pandemic
Economic impact: India’s GDP shrunk by a post-Independence record 7.3% in 2020-21, compared to global shrinkage of 3.3%.
Economy is expected to return to its pre-pandemic level of GDP only in 2022.
The pandemic will effectively cost India two years of lost income growth.
This contraction was preceded by 13 quarters of continuous decline in real GDP growth.
Potential reversal of socio-economic progress made over decades:
Study by Azim Premji University estimates that 230 million people may have fallen below a poverty measure of Rs375/day in rural India and Rs430/day in urban India between January and October 2020.
Pew Research Center estimates that the number of Indians living below $2/day increased by 75 million in the year since the pandemic struck.
Challenges to India’s growth prospects going forward
External factors: The return of advanced economies to normalcy and rise in demand is a positive development, yet there are major concerns such as
Inflation risk: Signs of rising inflation in advanced economies which typically induces a monetary tightening cycle.
Investment risk: These developments can make foreign capital more expensive, which will put downward pressure on an already tepid investment rate.
Public debt risk: Public debt levels in advanced economies have risen sharply during pandemic as they responded to the crisis with debt-financed fiscal expansions. There will be belt-tightening which will likely temper demand.
Oil price risk: The increase in global oil prices presents yet another external constraint.
Domestic factors:
Banking crisis: NPA overhang has not been rationalised. The economic contraction will only worsened this situation.
Continuing uncertainty surrounding economic environment had already induced an investment slowdown before 2020.
Botched vaccine policy:
created additional uncertainty regarding the state of public health.
Way forward
Need deep reforms: Fiscal costs of deep reforms are low, but their economic returns are potentially high.
Embrace regulatory reforms in labour and land markets that go beyond collecting different codes into one head and calling it reform.
Public sector divestment has to be embraced on a war footing.
Focus on the growth of large-scale low-tech manufacturing: This is the only sector that can employ 10 million new workers joining the labour market annually.