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ExplainSpeaking: Why the Indian economy is struggling to recover its growth momentum despite lockdown relaxations

The uncertainty about Covid's spread has made businesses and consumers jittery and unsure. There seems to be neither capacity nor appetite for consumption -- and in the absence of demand, industry has little incentive to ramp up production.

Written by Udit Misra | New Delhi | Updated: July 14, 2020 7:47:07 am
Coronavirus economy, covid 19 india economy impact, when will indian economy recover, indian economy 2020, lockdown economy impact, indian express, express explained Several shops with to-let signs on a Pune street. Despite shops opening, customers have been few. (Express Photo: Pavan Khengre)

Last week, two stories reported in The Indian Express stood out.

First came the news of a study by researchers from the Massachusetts Institute of Technology (MIT) that stated that the number of Covid-19 cases recorded per day in India may surge to 2.87 lakh by early 2021 if a vaccine or treatment isn’t developed soon. In fact, India may record the highest number of fresh cases in the world by the end of winter in 2021, according to this study.

Then came the story about how the initial uptick in economic activity — immediately following the relaxation of a nationwide Covid-induced lockdown — seems to be plateauing. Be it mobility data (both for work and recreation), jobs data or electricity consumption — the rate of increase has decelerated.

The two stories are closely related.

The first underscored the uncertainty surrounding the future course of the pandemic. No one can say for sure when cases will peak, or how quickly the curve will fall once it has peaked.

This uncertainty has very real implications.

It seems to have upset any chance of a steady and energetic resumption of normal business activity. Every week sees a city, district, or state enforcing newer, albeit limited, lockdowns.

Last week, a prominent international brokerage firm gave its predictions for India’s GDP growth rate. Its chief economist said that while the economy will contract this year, next year growth will rebound equally sharply.

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But the analysts gave no reason for their optimism. In fact, apart from a favourable base effect (essentially meaning that 2021 will be so poor that 2022 will look much better in comparison), there seems to be no real reason to be certain of a recovery next year.

Since Test cricket resumed last week, let me use cricketing terminology to paint a picture of what’s happening in the economy right now.

What the Covid disruption has done to the Indian economic agents — both businesses and consumers — is exactly what solid line-and-length bowling in the “corridor of uncertainty” just outside off stump does to an out-of-form batsman: we are all playing and missing!

It can be argued that the lowest point of the economy will come after (and not before) the number of Covid cases has peaked.

Yet, in the interim, with each passing week and month, the economic stress continues to build because the economy is working well below its potential. That essentially translates to individuals earning less and, as a result, holding back consumption.

That, in turn, makes businesses wonder if they should take fresh loans and ramp up production — never mind the problems of doing so — or simply stay put. It also makes banks unsure about extending new loans, especially because many previous loans are fast turning into non-performing assets (NPAs).

To be sure, over the weekend, RBI Governor Shaktikanta Das underscored the possibility of higher NPAs and capital erosion of banks, both public and private.

So then, what is the way out?

There is no quick fix. Given that the Indian economy was already struggling to grow before Covid, the journey out of this crisis will likely take more time than usual.

But nothing will happen without astute and targeted policy action.

For instance, governance in Indian banks (especially those in the public sector) needs to be reformed urgently. The P J Nayak Committee’s report of 2014 had outlined a set of sensible reforms but, apart from some cosmetic changes, very little has been done on that front.

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As a result, with each passing year, public sector banks have suffered losses with alarming predictability.

There are many such sector-specific reforms that are needed for the Indian economy to get back on its feet and become atmanirbhar.

Stay safe.

Udit

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