The Indian economy has surprised both domestic and global observer with the speed and trajectory of its recovery after the debilitating shocks inflicted by the Covid19 pandemic. Indeed, Prime Minister Narendra Modi has stated that while the priority during the worst phase of the pandemic was on saving lives, the government has a “roadmap for recovery”.
According to the Finance Ministry’s Monthly Economic Review, after a shock decline of over 23 per cent in the first quarter of the current fiscal, the decline slowed to 7.5 per cent in the second quarter. Early indicators for the October-December quarter of 2020-21 seem to indicate that the economy will continue to maintain its growth momentum, although it might, according to SBI Research, take nearly two years before economic growth returns to the pre-Covid level.
A recent report by the UN has also noted that India’s economy could prove the most resilient in the subregion over the long term. “FDI inflows have been steadily increasing and positive, albeit lower, economic growth after the pandemic and India’s large market will continue to attract market-seeking investment,” the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) stated in its evaluation of FDI trends for 2020/21. This only endorses Prime Minister Modi’s assertion that the global narrative has changed from “Why India?” to “Why not India?”.
However, unless the government gets its act right, this ‘V’-shaped recovery might quickly turn into a ‘W’, with growth going into another steep decline as the pent-up demand unleashed by the lifting of lockdown curbs peters out and the systemic weaknesses exacerbated by the pandemic reassert their influence. Unemployment has once again started to rise. Moreover, some of the pandemic-induced changes to work patterns appear to be permanent. Average pay increases have fallen sharply across industry and are likely to stay low, while the lakhs of white-collar jobs lost during the slowdown show little signs of recovery.
While some sectors like automobiles and consumer goods have shown positive signs, others, especially high employment-generating sectors like hospitality, travel and tourism, aviation and organised retail continue to face headwinds. With global recovery also sluggish, exports continue to be hit. Worryingly, government spending, which could have propped up demand, is showing a declining trend. Government expenditure fell sharply to Rs 3.62 lakh crore in Q2 2020-21 from Rs 4.86 lakh crore in the preceding quarter. Both revenue and capital expenditure fell in Q2, with revenue expenditure falling more steeply.
With the fiscal deficit hitting the Rs 10.75 lakh crore mark by the end of November 2020, which is over 135 per cent of the 2020-21 Budget Estimates, the fiscal headroom for the government has vanished. However, with both private consumption and investment plunging, the government will have to take a bold approach to spending, particularly on creating public infrastructure, which could spark an overall revival in demand across sectors. With less than a month to go for the presentation of the Budget for 2021-22, the ball is now firmly in the government’s court to come up with a bold plan to sustain and drive growth.