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Monday, November 30, 2020

Explained Ideas: Why India has little option but to open up the economy

As things stand, India is already likely to suffer a permanent loss of 10% of GDP due to Covid disruption, says D K Joshi.

By: Explained Desk | New Delhi | Updated: July 18, 2020 12:45:09 pm
Why india must unlock, indian economy unlock, india economic recovery, covid 19 effect economy, indian express, express explained Kolkata’s once-bustling New Market has few customers Thursday, July 16. (Express photo: Shashi Ghosh)

In his opinion piece in The Indian Express, Dharmakirti Joshi, chief economist CRISIL Ltd., maps the risks to the Indian economy due to the Covid disruption. He foresees a 25 per cent contraction in India’s GDP in the first quarter of the current financial year, and 5 per cent contraction for the entire fiscal year.

In effect, he says, “over the medium run, for India, we estimate the permanent loss at 10 per cent of GDP”.

The problem according to him is that “the monetary measures announced after the pandemic do not have the heft to trigger a recovery because of rising financial sector stress and lack of fiscal space”. Therefore, even as economic data of the past three months signals a move from “free fall” to “uneven improvement”, caution is in order.

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So, how does the economic recovery look from here?

To a large extent, it will depend on the shape the COVID-19 infection curve takes. Given India’s high population density and weak health infrastructure, the reliance so far has been on lockdown and social distancing. The longer the lockdown, the greater is the impact on livelihoods. That, in turn, necessitates income support for vulnerable households and financial support for susceptible businesses.

India has had little option but to open up the economy. This is because of several reasons.

First, some regions, where the spread has been faster, have reintroduced containment measures, which will adversely impact economic activity.

Second, the partial unlocking of the economy and the back and forth on containment measures will continue to pose a hindrance to supply chains, transportation and logistics.

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Third, it will take time to restore normalcy in the services sector, particularly in hospitality, travel, sports and entertainment.

“After two quarters of contraction, we foresee mild growth in the third quarter. But this is predicated on three things happening: The monsoon turning out to be normal, COVID infections peaking early in this quarter, and an additional fiscal stimulus of 1 per cent of GDP beyond what has been committed so far,” he writes.

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