Advertisement

Macroeconomic situation before and after COVID-19: Basant Potnuru

There is no doubt on the capacity of the Indian economy with its strength on consumption and public investment to be back on track after the pandemic is over, writes Basant Potnuru, FORE School of Management.

?

As the pandemic COVID-19 has engulfed nations and the world without any indication when and where it will end, realistic estimation of the economic loss caused by it is still a daunting task. Before we could understand the impact of COVID-19 on the Indian economy and businesses, we must understand that the economy before the pandemic has hit us, was also not at its best. The GDP growth rate had sharply declined from 6.6 percent in 2018-19 to 5 percent in 2019-20. The revised GDP estimate for 2019-20 shows that there has been a continuous decline in the growth rate from 5.6 percent in the first quarter to 5.1 percent in the second quarter, and further to 4.7 percent in the third quarter. Expect a further decline of another 5-7 percentage points to about 4 percent growth rate in the fourth quarter. In this case, we may have to compromise with an annual growth rate of below 5 percent in 2019-20.

Some of the estimates, including both from national and international rating agencies, put Indian economic growth rate for 2020-21 at a wide range of 4 percent to 1.1 percent. Most recently, some analysts (Acuite Ratings and Research Ltd) and industry experts stated that the 21-day lockdown with an exception to the essential services had caused a loss of Rs. 7-8 lakh crore to the economy. The extended lockdown until the 3rd of May with some more exceptions apart from the essential services may cause a loss of another Rs. 5-6 lakh crores, aggregating to the tune of Rs. 12-14 lakh crores. That is a contraction of about 8-10 percent of the GDP. This is going to increase as the disease prolongs, and regional specific or partial lockdowns are put into force. If all this turns out to be accurate and in the worst-case scenario, we will have a zero to the negative growth rate in this fiscal.

There is, however, no doubt on the capacity of the Indian economy with its strength on consumption and public investment to be back on track after the pandemic is over. Nevertheless, we might have difficulty on the supply-side to quickly accelerate production and match the spiked demand after the pandemic is over. Therefore, the duration of the pandemic, in turn, will determine our capacity to catch up with the natural growth rate quickly.

The second most important thing, to keep in mind, while making business projections and planning post-pandemic, is the amount of loss of earnings households, firms, banks and the government suffered during the pandemic. Though households would want to buy goods immediately after the lockdown is over, they will do so only in a controlled manner because of the loss of income it suffered during the pandemic and uncertain times faces ahead. The firms, banks, and governments would also have a lower capacity to spend because of the same reasons. The government economic stimulus package for severely affected sectors and the credit easing facilities will rescue from this difficulty to some extent. However, as already noted, the capacity of the government to do so adequately will also be limited. Therefore, expect slow progress on earnings of these agencies post-pandemic and slower growth of businesses too.

Nevertheless, there is an opportunity for the government in this time of crisis is to shift its policy focus from the supply-side to the demand-side. The government has tried its best to ease problems on the supply-side starting from August 2019, when the Finance Minister, Smt. Nirmala Sitharaman announced a series of measures to boost investor confidence by easing FDI and credit facilities, followed by a corporate tax cut. The RBI's accommodative policies have further incentivised investors. However, critically speaking, all of these measures could not arrest the declining economic growth rate quarter after quarter in 2019-20. This is because the fundamental problem of the Indian economy for some time has been the inadequate demand arising from the slack in the rural, farm and informal sectors. This has suppressed the chances of the economy recently far more significantly than the industry and policy experts otherwise thought of the problems of liquidity, trade-war and exports. Thus, the government has an opportunity now to put all its weight on stimulating demand by enhancing income and livelihood opportunities of the people dependent on the rural, farm and informal sectors. If that is the case, the economy would be able to bounce back on its path of faster economic development of 7 to 8 percent by 2021-22


Tags assigned to this article:
economy government policies Post covid

Around The World

Our Publications

Advertisement