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The Swift Recovery

Despite headwinds, leading indicators suggest that the Indian economy is heading towards $5 trillion as planned

By N R Bhanumurthy

Published: Wed 26 Jan 2022, 12:00 AM

Covid-19 has hit the global economy hard with some of the adverse impacts becoming permanent and some appear to be transitory. After two years, there are signs of recovery, although looks like uneven with advanced countries recovering faster while the rest are still reeling under pandemic impact. Similar to the global trends, Indian economy has seen slump and recovery. With GDP growth of -7.3 per cent in 2020-21 and an estimated growth of 9.2 per cent in 2021-22, there seems to be a clear V-shaped recovery in India. Even in terms of sectoral growth, there appears to be a sharp recovery in the commodity producing sectors (agriculture and industry) while the recovery is slow in the services sector. On the trade front, India has registered a huge jump in the exports’ growth and for the current financial year, the target has been hiked to $650 billion. There is also an increase in imports, which only suggest that the expected demand in the economy is back to the pre-Covid levels. There are other indicators that suggests India is recovering faster and will soon end up as one of the fast-growing large economies in the next financial year.

What led to this recovery? For this, one needs to understand the nature and causes of the slowdown as well as the policy interventions that were introduced since the pandemic hit the economy. As many commentators argued, the slowdown in the economy had preceded the pandemic. Indeed, the economy registered as low as about four per cent in 2019-20, although last part of the year could have been briefly affected by the pandemic. This was the period when even the potential growth had come down to a low level. Hence, one can characterise the slowdown in Indian economy into two parts: structural and cyclical. In terms of response, the policy uplift was largely done by the Reserve Bank of India that focused heavily on the supply side. This strategy seems to have worked well for India and this will be understood if one compares it with the inflationary conditions prevailing in most of the advanced economies. Some of them are experiencing a three-decade high of inflation and there are discussions on whether some countries would get into stagflationary conditions. Indeed, as recent IMF report suggested, there are headwinds to the global growth as there could be premature withdrawal of policy stimulus in the advanced countries due to high and rising inflation. These issues are nowhere near in the Indian context as the inflation is still within the acceptable range of two to six per cent. The inflation expectations also appear to be anchored well and with expected bumper agricultural production, one may see that unlike other countries, India may not be anywhere near the stagflationary conditions. Fiscal policy focused heavily on increasing capital expenditure rather than the consumption expenditure and focused on supply-side reforms that would have medium term impact on growth.

In a way, the recovery in India is on a durable basis. Unlike leading indicators, employment is a lagging indicator and it follows the economic recovery. Any policy measure that results in durable recovery should lead to higher employment opportunities. The good news is that as discussed earlier, the recent recovery is largely in the commodity producing sectors that have higher employment opportunities, unlike in services sector. But more than the growth prospects for the coming year, what is important is the medium-term growth prospects. Can India still achieve the $5 trillion economy in the coming five years? Are the policies in place to achieve this medium-term target?

India seems to have converted the Covid crisis into an opportunity with various policy reforms although, it has made one step backward regarding some crucial reforms such as land and agricultural reforms and some hesitancy in labour reforms. While pros and cons of these reforms are debatable, one could confidently say that there are not many mis-steps atleast during the pandemic period. Indeed, during this period, India came out with a slogan Atmanirbhar Bharat (‘Self Reliant India’) and this is consistent with the earlier call of Make In India. Privatisation has been another important focus of the government. Unlike in the past where disinvestment and stake sale was the route, right now the government started talking about outright privatisation and proceeds from which are planned for building infrastructure that has been long pending. An ambitious National Infrastructure Pipeline that is complemented by equally ambitious National Monetisation Pipeline are in place and their initial trends, unlike other disinvestment plans, are encouraging.

With the long list of reforms that have already been introduced and with renewed focus on infrastructure and privatisation and with conducive macro-fiscal policy framework, India is poised to improve its potential growth and achieve the medium-term growth target in the next five years.

— NR Bhanumurthy is the Vice Chancellor, Dr BR Ambedkar School of Economics, Bengaluru, India

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