Of many risks to economic recovery, the lack of a vaccination policy is the most notable

Kiran Nanda

The second, wild onslaught of the coronavirus has cost us millions of lives and livelihoods. For us in India, although the number of cases is falling, what is worrying is that this time, unlike last year, the pandemic has reached rural areas. Aside from people losing their jobs, the middle class is shrinking. Forecasts for India’s economic growth are lowered.

There are a range of opinions as to when a sustained recovery will occur. However, no forecast can be accurate and certain as the situation is still evolving. RBI’s best-case scenario is that the economic cost of the second Covid wave could be limited to Q1 FY22. Contrary to June’s baseline assumption, normalcy may not return until July. The greatest uncertainty is what will happen after December 2021. Will the economy return to rapid growth or face a mid-term debacle?

Thankfully, the deadly second wave of coronavirus has begun to subside, with new cases declining and deaths falling significantly. Widespread despair is being replaced by cautious optimism thanks to vaccination campaigns. Markets are cheering the recovery rate, which is outpacing new cases. A rising rupee and positive global markets support the uptrend in equity markets, although its sustainability is questioned. The RBI policy review in June should push this further.

Important negatives

• India’s unemployment rate soared in May to its highest level in the last year – 11.9 percent, compared to 7.97 percent in April. The urban unemployment rate was 14.73 percent in May, compared to 9.78 percent in April, and the rural unemployment rate was 10.63 percent, compared to 7.13 percent in April 2021. The rise in unemployment was a global phenomenon, with a projected rate of 5.7 percent in 2022. According to the ILO, it will take 2023 before there can be sufficient global employment growth to offset the losses.
• Prolonged lockdowns have created a massive revenue crunch for the government, which has seen its borrowing so far this fiscal year rise to Rs 2.1 lakh crore – up 55 per cent from a year ago. Thanks to RBI’s skilful revenue management, the low cost of the money collected was the only salvation.
• Inflation fears are mounting despite the RBI handling inflation well. Global commodity prices have been rising steadily, raising concerns that higher inflation could prompt foreign central banks to reconsider their accommodative policies, which in turn could impact India as well.
• There are doubts as to whether growth, which comes with widely divergent lives and livelihoods, could qualify as a recovery. Official statistics do not capture the informal sector, which has been hit hard by Covid and the drop in demand.

Lots of silver linings

• The economy performed better than expected in FY21 – growing 1.6 percent in the fourth quarter of FY21 and contracting 7.3 percent for the full FY21. Some encouraging implications from the latest GDP figures – the agricultural sector, which accounts for over 16 percent of the economy, achieved growth of 3.6 percent, proving once again a boon for the 50 percent of the population that depends on it. The FY21 budget deficit came in at 9.2 percent, better than the budgeted 9.5 percent (RE). Remarkably, after a long gap of six years, the investment rate has exceeded 30 percent of GDP. All of these signs bode well.
• The government has continuously introduced proactive and pro-growth policies such as the production-linked incentive scheme covering a number of critical sectors, established DFIs, actively pursues the privatization agenda and supports MSMEs in a variety of ways. The RBI has done an excellent job on the monetary policy front, keeping liquidity plentiful in the system and interest rates low despite building inflationary pressures. With uncertainties mounting, a sustained pickup in private consumption and investment would be crucial to sustain post-pandemic economic growth. A rebound in investment is unlikely to happen without a pick-up in consumption.
• Corporate resilience is obvious. Businesses adapt to new realities by becoming cost-effective and productive. Business structures are being restructured to keep up with the new normal. Many new companies are formed, such as B. State e-commerce operator warehouses; E-wallets (digital purses) with the RBI, which, among other things, allow more flexibility for digital payment mechanisms.
• FDI inflows remain large and steady. FX reserves have reached a lifetime high of nearly $593 billion, enough to cover over a year’s worth of imports, strengthening the Indian rupee.
• The market cap to GDP ratio is currently well over 100 percent, well above the long-term average of 75 percent, leading many investors to worry that the market may be in the bubble zone. The total market capitalization of companies listed on BSE has surpassed the $3 trillion mark for the first time, just four years after the $2 trillion mark, which had lasted 10 years. The main reason for this rally is the loose monetary policy being pursued by all major central banks around the world. However, the rally in stock markets seems at odds with the economy reeling under the onslaught of uncertainty from further waves of the pandemic and the lack of a clear vaccination policy.
• A recent Credit Suisse report on Indian unicorns shows that “Due to the remarkable confluence of changes in the funding, regulatory and business environment, there has been an acceleration of 100 unicorns in India with a combined market capitalization of $240 billion.“India has the third largest number of unicorns in the world. Banking tech startup Zeta has become the newest unicorn in India, bringing the number to 13 in 2021. From fintech, agritech and pharma to green energy, unicorns are driving solutions even amid the pandemic. This implies the continued rise of entrepreneurship.
• India stands on the cusp of major AI innovations to be used in areas such as healthcare, education and justice. Building efficient AI systems requires huge amounts of data. A positive aspect of the UPI transaction system was the huge storage of data across systems. The main area of ​​application of AI would be to improve services and the quality of decision-making. A national digital platform is to be created for the healthcare sector, which brings together all healthcare offers on one platform. This transformation has been made possible by the adoption of technology at an unprecedented pace.
• Global trade in goods continued to recover in 2021, with large gains in export orders, air freight and electronic components. India’s exports rose 67.4 percent in May, driven by healthy growth in sectors including machinery, pharmaceuticals, petroleum products, chemicals, and gems and jewellery. However, new waves of infections could easily undermine the recovery.

Make the most of it

In summary, trying to make the best of the situation. In this exercise, the role of policy-making has become extremely crucial and delicate. Even as the pandemic continues to wreak havoc, the economy is unabated, albeit modestly, toward recovery. Agriculture and IT as two sectors bravely weathering the COVID storm. However, it is imperative to recognize that India has a longer road ahead of it to move beyond the agony of the pandemic. Crises are often opportune moments to take decisive action for a bright future like that achieved in 1991.

There are many risks to economic recovery, the most notable being the lack of a clear vaccination policy. Bureaucracy could delay economic recovery. Companies, many of which are backed by foreign investors, may reconsider their investment proposals. India Inc profits are being hurt by rising input costs. According to RBI, the rally in domestic stocks poses a risk of a bubble despite an estimated 8 percent contraction in FY21 GDP. The widening gap between inflated asset prices and the prospects for a recovery in real economic activity has become a political issue in India and abroad.

fiscal stimulus

The FM has yet to take a call for tax incentives. A decision will only be made after assessing the impact of the second wave and the February 1 budgetary measures. India Inc should contribute to the ‘stimulus’ with its record profits and significant cost cuts. While the need for fresh stimulus is huge, authorities should keep in mind that once the pandemic is contained and the real economy is firmly anchored on the path to recovery, there needs to be a calibrated withdrawal of stimulus. Of course, the timing of this is uncertain. Although the further development and the occurrence of a third wave are uncertain and unpredictable, both the government and the industry expect the situation to improve soon.

The daunting task of improving health infrastructure and expanding the vaccination offensive remains. This will create widespread mobility and confidence in the country’s economic and employment activities.

Finally, generating reliable statistics is extremely important. Every state should share correct data. Data transparency is paramount otherwise it will be difficult to manage both the Covid pandemic and the economy. We must recognize that this pandemic poses an enormous threat not only to financial stability but to the entire economic and financial system. Most importantly, effective and timely leadership is vital.

The author is a business economist