A Time For Deep Reform

The Indian Express     12th August 2021     Save    
QEP Pocket Notes

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.
QEP Pocket Notes