Building Tomorrow: Long-Term Economic Trends in India

Even before the COVID-19 lockdown, the Indian economy was slowing sharply. Private consumption and government expenditure, two of the main drivers of economic growth, were faltering. COVID-19 has dealt the economy a severe blow. How will the country’s slowdown and impact of COVID-19 in recent months affect its economic outlook?

Impact of COVID-19

COVID-19 pulled out the rug from an economy that was already stumbling. Private consumption ground to a near halt, curtailing tax revenue and severely constraining government expenditure — something that we now know the economy depends on. Complicating this is the very high fiscal deficit, which limits the government’s option of borrowing more from the market.

It is now increasingly evident that COVID-19 has severely impacted gross domestic product growth and the country is staring at the possibility of a recession and serious contraction. The International Monetary Fund estimates that the contraction may be 4.8%, while other economists predict between 5 and 7%, which is very serious for a country like India. Recently ICRA Limited predicted a whopping 8.5% contraction.

Economies like India are still struggling to control the spread of infection. Large parts of the economy are still under shutdown, and it will take a much longer time for them to emerge from it. We are seeing a loss close to $9 trillion in output over two years in the global economy, which is quite steep. The Indian economy would not be too contrarian to these global trends.

Issues in Policy Response to the Crisis

Much of the government and the Reserve Bank of India’s (RBI) efforts are geared toward the supply side in a bid to increase liquidity. However, because demand is compromised, there is a huge problem in reigniting the economy. All government measures geared toward opening economic activities have not moved the needle much. At this rate, it will take India around two years to fully recover and go back to the pre-COVID-19 level of growth.

Lack of Long-Term Strategy

Economic packages, announced by the government and the RBI, address the supply-side issues rather than the pressing problem of demand. We are not seeing evidence of a very well-thought-out long-term strategy for accelerating economic growth and creating a vibrant investment environment that would result in creating jobs and provide decent livelihoods for the young population.

The various liquidity measures announced by the RBI and the government’s stimulus package are aimed at liquidity-boosting and credit-related measures like interest rate cuts and special facilities for encouraging lending. What policymakers seem to miss is the stark reality that businesses are struggling to repay their existing debt. As a result, there hasn’t been much of a movement on the uptake of debt.

Stimulating Consumer Spending

The government’s debt is about 70% of its revenues, and it can always go up a little more. I don’t think that the government will be in great difficulty if it raises its borrowing limit in these extraordinary times. The deficit will certainly go up. To build the confidence of the market, the government needs to provide a concrete plan, a path to get the fiscal deficit back to 3% over the next five years. If the government strategically plans the exit from the stimulus at the time of announcing it, I do not see any problem with even printing money and monetizing the deficit, which could minimize unemployment and boost consumer spending.

Loan Moratorium Extension

The loan moratorium would have worked extremely well if the government had announced demand stimulus along with it. That would have given industry six months of breathing space, during which — because of enhanced demand — inventories would have moved and production cycles would have started. As the demand would have led to production and sales, a virtuous cycle could have been created.

Unfortunately, we don’t see demand coming back. The three months of moratorium may go up to six months or eight months or a year, but at the end of it we are still going to see rising nonperforming assets and firms going into bankruptcy. Therefore, the moratorium of three months announced by the government is only a temporary palliative. It won’t be of great help to industry.

Path Ahead

India needs a positive shock to its economy. The fastest way is to put cash in the hands of the poor and support industries and businesses, especially the Ministry of Micro, Small and Medium Enterprises (MSME), with salary subsidies to ensure they continue to employ workers.

India must also take this opportunity to reimagine businesses by introducing laws to encourage new start-ups. One of the most progressive laws, enacted by the Government of Rajasthan, is the Micro, Small and Medium Enterprise (Facilitation of Establishment and Operation) Act. This omnibus law removes the requirement of prior approval under any state law for a period of three years for any MSME firm. A similar law for central regulations could prove a game changer.

The next 10 years must be used to bring the next set of 5 to 700 million people into the consumption class. For this, we will need major reforms to build high-quality institutions and create more stable and inclusive and less fractious politics.

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About Dr. Arvind Mayaram

Dr. Arvind Mayaram, PhD, is an Independent Consultant since November 2015 and Honorary Chairman since August 2016 at CUTS Institute for Regulation and Competition. He is also Honorary Economic Advisor to the chief minister of Rajasthan. From November 2014 to October 2015, Dr. Mayaram was Secretary, Minority Affairs, Government of India. From 2012 through October 2014, Arvind was Finance Secretary at Government of India. Dr. Mayaram was Special Secretary and Financial Advisor, Ministry of Rural Development, mandated as the financial controller for four departments: Rural Development, Rural Drinking Water Supply, Land Resources, and Panchayati Raj (Rural Local Self-Governance), overseeing an annual budget of over USD20 billion.

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This article is adapted from the July 7, 2020, “Building Tomorrow: Long-Term Economic Trends in India” GLG Remote Roundtable. If you would like access to this teleconference or would like to speak with Dr. Arvind Mayaram , or any of our more than 700,000 experts, contact us.