Hurdles on the path of economic recovery

News from the economic front is a mixed bag. By all accounts the immediate outlook is bad. But the chances of an early recovery are said to be bright.  

Like the global rating agencies, the International Monetary Fund too expects the economy’s performance in the current financial year to be worse than anticipated earlier.

In a report released last week, focusing on the global impact of the coronavirus pandemic, the IMF said it would hit India harder than any of the other large economies.

Taking into account the effect of the nationwide lockdown declared at the end of March and the continuing spike in coronavirus cases, it estimated that the Indian economy would contract by 4.5 per cent in the financial year which began on April 1. Earlier it had predicted the year would see a GDP growth of two per cent.

The last time India’s economy underwent contraction was 41 years ago.

India-born Gita Gopinath, the IMF’s Chief Economist, held out the hope that the economy would bounce back next year to register an impressive growth of six per cent.

Reassuring as this forecast is, it has to be viewed against current trends as well as many imponderables such as the spread of the pandemic and the face-off with China on the border which shows no signs of easing.

In the annual Economic Survey, presented to Parliament last February, the government had projected a growth rate of 6 to 6.5 per cent for this year.

When that target was set it was assumed the previous year would witness a growth of 4.5 per cent.

Now we know that a growth of 4.2 per cent, which is quite close to the anticipated figure, was recorded. But the economy was going downhill when the year ended. The growth rate in the final quarter was only 3.1 per cent.

The pandemic arrived as the year was ending. The lockdown that followed accelerated the downslide.

Against this background, it may be unreasonable to expect a quick jump from a contraction of 4.5 per cent this year to an expansion of six per cent next year.

The virus has infected more than half a million people so far and the curve is unlikely to flatten in the immediate future.

A study commissioned by the Indian Council of Medical Research has said the pandemic may peak by mid-November and that by then the number of infections may go beyond two million. This means the process of recovery can start only in the second half of the financial year.

If the government has any estimates of the economic costs of the pandemic, it has not cared to share them with the public. Some economists have suggested there may be a loss of 40 million jobs, mostly in the unorganised sector.

There is fear that the pandemic may affect agricultural production adversely, leading to shortage of food grains.  This may cause widespread distress.

The measures announced by the government and the Reserve Bank of India so far to mitigate the impact of the pandemic do not appear to be sufficient to meet even the current situation.

While talks at various levels are on to defuse the situation on the border, reports indicate that the Chinese forces are digging in and that India is strengthening its forces to meet the perceived threat.

Reports emanating from Beijing have repeatedly affirmed the connection between the sudden aggressive Chinese moves on the border and the Modi administration’s precipitate action in Jammu and Kashmir last year.

Home Minister Amit Shah’s thoughtless remarks in Parliament about taking back areas under Chinese and Pakistani control appear to have contributed to the trouble on the border.

Corrective steps in J&K and Ladakh must be seen as a necessary part of the urgent measures needed to secure the border.

Observers at home and abroad have noted that India and China were more or less on the same level economically when the border issue flared up in the 1960s. Now the Chinese economy is four and a half times India’s in terms of nominal GDP. The gap is slightly less in terms of purchasing power parity.

Such a wide gap is sure to be a source of temptation to a neighbour with hegemonic ambitions.

India needs to put divisive politics aside and galvanise all sections of the people to realise its full economic potential.