“You can’t discover light by analysing the dark.” The quote by Wayne Dyer resonates with the four-month episode of the great economic fall that followed the pandemic, with predictions of a gory climax. Critics claimed that it would take more than one or two years for India to reverse the Q1 23.9% GDP contraction.
The last four months, however, have witnessed a desirable twist; a flush of optimism for businesses, governments and the financial markets, brought in by a 7.5% contraction in Q2 — better than most street estimates. This figure beats the global average, where according to an analysis by State Bank of India, 49 economies declined at an average of 12.4%.
Going by the latest trends and government forecasts, India’s economy is likely to return to pre-Covid-19 levels by the end of the current fiscal year, which is much earlier than expected. The Reserve Bank of India (RBI) has predicted a positive growth in the second half of FY21.
Take a look at the recently published Q2 data — manufacturing PMI is above 50 for the fourth straight month; the Nomura India Business Resumption Index (NIBRI) reached 89.2 last month, only 11 percentage points lower than pre-Covid-19 levels; growth in other trends such as foreign policy investment, foreign direct investment (FDI) and corporate bond market inflows point to strong investor faith in India’s economic resilience. Besides, upwards revisions by rating agencies in India’s GDP forecast are all telling the same story — that we have kicked off the rebound phase.
This recovery sentiment has been buoyed largely by the bold leadership of Prime Minister (PM) Narendra Modi, and frequent policy interventions by the central government. Over the last eight months, the government has not just expanded the ambit of its Covid-19 response strategy by pooling in massive resources for virus control and acquiring vaccination, but has simultaneously employed the Keynesian prescription for recession, ie spending (worth ₹20 lakh crore) to boost aggregate demand. This reflected in the recently-announced stimulus package, which focused on resetting demand by introducing new employment schemes for the formal sector workforce. It is worth noting that unemployment levels are currently on a decline; the 6.7% unemployment rate for September was lower than the pre-Covid-19 level of 7.6% in February. Besides, fiscal stimulus and tax rebates for growth-critical sectors, such as housing, would have spillover effects, thus indirectly boosting demand-led growth.
Looking at all three stimulus packages, it is clear that the government’s fiscal response has been calibrated, where it has made judicious choices in spending, especially with regard to continuation or expansion of certain schemes. The one that stands out is the extension of the 100% credit guarantee scheme to 26 stressed sectors. Similarly, incentives to firms through the expansion of production linked incentive (PLI) schemes worth ₹1.46 lakh crore for 10 new sectors will give a boost to the manufacturing sector, and result in long-term benefits for the economy. A calculated restraint in spending the money of taxpayers is critical in the face of limited fiscal space.
What is equally laudable is that the government has stayed on the ball in taking small steps to forge the big picture of an Aatmanirbhar Bharat. While fixing the broken, it also unleashed structural reforms across various sectors that promise far-reaching benefits for the economy. For instance, the liberalisation of the notoriously rigid formal labour market would expedite India’s upward movement in the ease of doing business rankings, and attract further investments.
Since 2014, India has moved up 79 positions in the World Bank’s Ease of Doing Business rankings. Reforms and timely fiscal interventions in other critical sectors are already showing positive results: The Gross Value Added for three sectors (agriculture, manufacturing and utilities) has been positive in Q2, as compared to just one (agriculture) in Q1 this year.
This positive sentiment is not just evident in growth indicators, but can be seen among the people as well. The Bharatiya Janata Party (BJP) swept the by-elections in seven states, besides improving its performance to return to power in Bihar.
The leitmotif of the government’s economic and policy efforts is to open up more windows for India to gain from the current vacuum in the global supply chain. At the same time, there will be a sustained focus on reforms to enable a conducive environment for start-ups, micro, small and medium enterprises, and other businesses, and propel a global market for local products.
For now, the government’s prognosis for the near future is as follows. The first priority is to keep the pandemic spread under control, and thus, eliminate the possibility of facing a second wave of the virus. The second is to sustain the momentum of recovery, so that it enters the positive territory by the end of the third quarter.
The Covid-19 battle is proving to be a long-drawn-out one, where all the countries have seen severe output losses this fiscal year.
However, with India’s impressive pace of recovery, the declining graph of active Covid-19 cases, and with the vaccination distribution blueprint in place, perhaps, the light at the end of the tunnel is not as far as it seems.