Indian economy: Current Challenges & Future Threats


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    The Indian economy is completing the first quarter of the current financial year — April, May and June. Two questions come up in this context:

    • How far did the second Covid wave hurt India’s fledgling economic recovery?
    • What are the more medium- to long-term impacts of the second Covid wave?



    • The National Council of Applied Economic Research (or NCAER) released its Quarterly Economic Review.
    • The NCAER distinguished itself in finding innovative ways to map the state of the Indian economy during the pandemic. 
    • At a time when official sources of data suffered large gaps and inadequacies, researchers at NCAER found their own ways to assess the extent of economic disruption due to Covid. 



    • Two years worth of GDP growth has been lost: 
      • The chart below provides an understanding of how the Indian economy has been hit. A fall of minus 7.3% is visible in GDP.
      • In terms of overall economic production, India would have lost two full years of growth. 
      • There is a chance that India may grow by 10.1% this year, instead of 8.3%, and in that case, India’s GDP would go up to Rs 149 trillion but even so, India would be far off from where it could have been without Covid.
      • “V-shaped” recovery is seen in the chart but, in terms of actual production, the economy will only manage to recover the ground it lost last year.



    • Both retail and wholesale inflation is trending up:
      • At a time when economic growth has taken a hit and recovery is muted due to the second Covid wave, India is also facing ever-increasing prices.
      • Headline retail inflation is the rate at which prices increase for retail consumers. 
        • It stayed above the RBI’s comfort zone (2% to 6%) between November 2019 and November 2020. But, after a brief period of martial relief, it has again crossed the 6%-mark in May this year.
      • Core inflation is calculated by taking away the price rise in fuel and food items. 
        • The fact that even this inflation rate has remained consistently close to RBI’s upper limit, shows that it is not just a matter of petrol and diesel prices being very high or vegetables and fruit prices rising too fast. The common Indian is witnessing a fast rise in prices across the board.
      • Wholesale prices:
        • For a long time, the wholesale prices were not increasing too fast. 
        • But starting from January onwards, that trend, too, has worsened. 
        • In May, WPI inflation was nearly 13%. In other words, wholesale prices were rising at the rate of 13%.


    • Poor credit offtake in the commercial sector:
      • The biggest engine of GDP in the Indian economy is the expenditure that Indians undertake in their private capacity
      • This demand for goods and services — be it in the form of a new car or a haircut or a new laptop or a family vacation — is what accounts for more than 55% of all GDP in a year.
      • Even before Covid, the Indian economy had reached a stage where the common man was holding back this expenditure
      • The first Covid wave made that trend worse with people either losing jobs or salaries being reduced. 
      • The second Covid wave has compounded the problem further because now everyone is bothered about the high health expenses.
      • In the absence of consumer spending, the country’s businessmen — both big and small — are holding back new investments and refusing to seek new loans.
    • Inadequate spending by the government:
      • Given that domestic consumers are holding back consumption and domestic businesses are holding back investments (the second-biggest engine of GDP growth), it was incumbent on the third-biggest engine of India’s GDP growth — that is, the government — to spend more and pull the economy out of the current rut.
      • The spending by the Government is not even close to an average mark.
      • An inexplicably contractionary fiscal policy in 2021–22, sharply reducing the deficit, will delay recovery.

    Image Courtesy: IE


    • The slow pace of vaccination and a possible third Covid wave:
      • Vaccination is a major tool in the present scenario which can, to an extent, bring out the country from this economic mess.
      • If the pace of vaccination continues to lag, there is the possibility of a third wave, which may bring with it another round of disruption.
      • The increased uncertainty further worsens the trends of consumers holding back consumption and businesses holding back new investments
    • Monetary policy hitting a barrier:
      • Between fiscal policy (which has to do with government’s spending) and monetary policy (the ease with which one can take a loan and the interest rate one has to pay on new loans), most of the heavy lifting towards achieving economic revival has been done by the RBI
      • The government has not been expanding its fiscal policy by as much as many expected it to. 
      • But there are several reasons why RBI may not be able to help out for much longer because:
        • Inflation rates are spiking: The RBI, which is legally required to control inflation, will have to do whatever it takes to keep inflation within bounds. Typically, this would require the RBI to raise interest rates.
        • The sharp spurt in economic growth and inflation in the US, its central bank — the Federal Reserve — could soon raise US interest rates. If India has to remain an attractive destination for global investors, RBI would have to give up on the regime of low-interest rates.
    • Hysteresis- The long-term adverse effects of short-term shocks:
      • GDP has to grow well above the recent pre-pandemic trend rate (5.8 per cent) for India to catch up with its pre-pandemic growth path. 
      • The impacts of this Covid shock are more long term than one might imagine and by then India would have gone beyond its sweet spot of so-called demographic dividend, so the long term impacts are very very frightening.


    Steps taken by Government to Ameliorate Impacts

    •  Special Economic and Comprehensive Package
      • The Government announced a special economic and comprehensive package under AtmaNirbhar Bharat including measures taken by RBI amounting to about Rs. 27.1 lakh crore – more than 13 per cent of India’s GDP– to combat the impact of the COVID-19 pandemic and to revive economic growth.
      • The package included, among others, in-kind and cash transfer relief measures for households, 
      • Employment provision measures under Pradhan Mantri Garib Kalyan Rojgar Abhiyaan and increased allocation under MGNREGA. 
      • Credit guarantee and equity infusion-based relief measures for MSMEs and NBFCs and regulatory and compliance measures. 
    • Structural Reforms
      • Announced as part of the AtmaNirbhar Bharat Package which included 
      • deregulation of the agricultural sector, 
      • change in definition of MSMEs, 
      • new PSU policy, 
      • commercialization of coal mining, 
      • higher FDI limits in defence and space sector, 
      • development of Industrial Land/ Land Bank and Industrial Information System, 
      • revamp of Viability Gap Funding scheme for social infrastructure, 
      • new power tariff policy and 
      • incentivizing States to undertake sector reforms.


    Way Ahead

    • Deep and wide-ranging structural reforms in the financial sector, power & foreign trade are the need of the hour. 
    • Also, reforms in cooperation with the states are also urgent in health, education, labour and land, which are all primarily state subjects.
    • Cooperative federalism is the only key out of this vicious trap of covid and economy.


    Sources: IE