The government once again holds the reins of the future of India’s economic growth in FY23. Quite ironically, the new year has been heralded by a surge in COVID-19 cases and this is just the beginning. The past pattern has been that as cases increase, they peak in around 2-3 months before the tapering starts. There is, however, no certainty of such trends as these can vary. South Africa already seems to have worked its way out of the Omicron situation and conditions have eased. Here, nonetheless, the government will have an important role to play.
The challenge in India is that there are multiple layers of government: Centre, states, municipalities and panchayats. Each one has the power over its jurisdiction in terms of what can be done. Health worries can be tackled in different ways by various states and hence the guidelines provided at the macro-level like the Centre and states will not be binding on the micro-levels of government. This has been a conundrum in terms of implementation of rules. In the past too, we have seen that when the Centre argued against lockdowns in 2021, states had their rules based on subjective judgments which created chaos in terms of what could or what could not be done. This is why the new wave is dangerous from the economic standpoint.
It was expected that the economy would rebound in 2021-22 and growth rates of above 9-10 per cent have been projected by most forecasters. Any lockdown in the coming months could push back the economy in Q4 and make it that much more difficult to recharge the economy. In particular, services are to be targeted, where social distancing norms are hard to implement. One reason for the rebound seen in the third quarter of FY22 was the opening of the services sector, which includes entertainment, travel and tourism, and the hospitality industry in particular. These industries were buffeted successively by the two sets of lockdowns in 2020 and 2021.
As of December 2021, most of these services were operating at 60-80 per cent of capacity due to restrictions still remaining in the form of maximum permitted occupancy. Further lockdowns will mean that these services will not just lose business but also witness hesitancy in employment and investment. Employment is highest in the services sector and in case financial services are excluded, the others have already been pushed back in the last two years and will be hesitant to get back labour after three rounds of lockdowns. This is why governments need to tread cautiously. Lower business also affects investment and business-like malls have already seen closure due to the non-viability of several outlets in these establishments.
What does this mean going ahead? Governments will have to take the lead again in supporting the economy and the onus is both on the Centre and states. The Budget for FY23 will have to keep the third wave and lockdowns in mind so that the budgets have to make two assumptions. One is that the relief to the poor will have to continue for one more year and here, the states that impose lockdowns have to share the burden to an extent. So far, the Centre has taken on this support which has been one-sided.
The second is that both the Centre and states will again face the challenge of garnering revenue once lockdowns are in place. The hit on revenue is serious because it does not end with just the revenues of states being affected but also the compensation to be provided by the Centre on GST. Officially the compensation was to be for five years and a call has to be taken whether to extend the same. In fact, states have enjoyed the benefit of this compensation from the Centre through the lockdowns because had there been no GST, they would have been left in the lurch with no support coming from the Centre.
Further, the government will once again have to assume the role of pivot for investment as private sector interest would be limited to a few sectors if there is another lockdown. Therefore, it would be imperative for the Centre and states to keep tapping away at investment-boosting measures for one more year.
Again, the dilemma for the RBI will get exacerbated for sure. Inflation is already ruling high and looks unlikely to come down. At the same time, the economy will display several signs of uncertainty and the RBI has to once again look at growth. In the December policy, the RBI did provide some hint of confidence in growth but left the projection at 9.5 per cent. The minutes show that there was talk on containing the liquidity deluge in the system. Discussions in the MPC were on how to address inflation and the rollback of liquidity was a consideration. There has to be further deferment in case there are actions taken by the government.
The reaction of the government has been cautious so far. There were curfews imposed in the last fortnight of December, which affected hospitality and tourism alike quite significantly. Signals have been sent by local governments that more are in store if cases rise. And this is most certainly going to happen. The fact that a large set of people are vaccinated should probably protect against serious infection, but one cannot tell. The stock market however, continues to be belligerent for sure but the government response would guide the future of the economy.
