Context: The latest Gross Domestic Product (GDP) forecasts give a hope that the economic decline will be restricted for the full year to be in single digits.
Positives for India’s recovery:
Narrowing of nominal Gross Domestic Product (GDP) loss: From Rs 11.1 lakh crore in 1st quarter to Rs 1.98 lakh crore in the 2nd Sector-wise data includes -
Agriculture: has added 0.4% to GDP in both the quarters.
Manufacturing: including construction, loss reduced by 91% from the first quarter. This is because of massive purge in costs.
Trade and Services: Services has reduced its losses by 43%, while the losses incurred by the trade sub-segment have fallen by a staggering 80%.
Decrease in nominal GDP loss: From Rs 11.1 lakh crore (1st quarter) to Rs 1.98 lakh crore (2nd quarter).
Changes in innovation: amidst pandemic -
Accelerated the pace of technology adoption in the banking system in India;
Technology adoption in the credit guarantee scheme for Micro, Small and Medium Enterprises (MSME) has been of resounding success.
Data consumption in rural India on the network of common service centres and special purpose vehicles also jumped by nearly 100% during the lockdown.
Proactive approach of the Reserve Bank of India (RBI):
Assuaged the market that liquidity problems will not translate into solvency problems.
Gave explicit forward guidelines of rates for an extended period for better market sentiments.
Challenges to India’s recovery:
Increase losses in certain sectors: including financial, real estate and professional services and public administration segment, where losses have jumped by 50%.
Data discrepancy: in the second-quarter numbers, which amount to 1.7% of GDP; moreover the job of data collection by the Central Statistics organization has become difficulty amidst pandemic.
Rising inequalities: Due to cost-cutting by manufacturing units, there were significant labour market disruptions, increasing inequality and thus a material impact on consumption.
Firms were more likely to terminate the employment of temporary workers, compared to that of permanent workers (owing to their skill premium). - NCAER’s Business Expectations Survey.
In India, inequality has increased but not significantly worsened. OECD Data
Threat of high Incremental Capital-Output Ratio (ICOR): The ICOR in India has increased from 3.8 in 2016-17 to 4.9 in 2018-19 and is expected to further deteriorate to 6.9 in 2019-20.
Delays in the completion of projects, lack of complementary investments in related sectors and the non-availability of critical inputs can all lead to a rise in ICOR.
The higher the ICOR, the less efficient the use of capital.