India's growth story has never seemed so endangered

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 India's growth story has never seemed so endangered

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Read more on - Polity | Economy | Schemes | S&T | Environment

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• Massive contraction of 24%: GDP growth was expected to be negative but a fall of 24% in Q1 means India lost Rs. 8.5 trillion of national income in Q1, becoming one of the worst performers in G20.
• Impact: GDP losses in some advanced economies have not been as high but impact on livelihoods even in those countries has been sizeable. India has one of the lowest per-capita incomes among the G20. The impact on poor households and small businesses has been disastrous.
• Hysteresis effects of demonetization: The pandemic-led economic crisis will take long to recover even after public health risk goes away and lockdowns are lifted completely. The self-inflicted shock of demonetization in 2016 severely affected cash-based supply and credit in the informal sector and effects continued long after high-denomination currencies came back into circulation.
• The migrant crisis: Migration of labour from villages to cities is a key feature of economic development. The lockdown imposed with little planning sparked off a reverse trend of migrants walking back to their villages. Some migrants got trapped in cities without any work, many went home where there was no productive work, and many languished in between. Like the effects of demonetization (from which many never recovered), the hasty lockdown which led to the migrant crisis during the pandemic will also have severe hysteresis effects.
• Fiscal response: New spending in government’s Rs. 20 lakh relief package was touted to be 10% of GDP. The net new spending after considering effects of monetary expansion and pre-existing schemes amounts to only 1% of GDP. Total spending to fight the crisis in India’s case is just about 2%. Most advanced and emerging economies are spending 5% to 10% of the GDP. 
• Monetary response: No unconventional monetary policies have been announced to combat the crisis. Other countries are not adopting conventional policies that work during normal times in a healthy economy. 
• Structural reforms: “Second generation” structural reforms of land, labour and capital market, and regulatory reforms have also been long awaited. 
• A little too late: It might be a little too late to introduce the much-delayed structural reforms. Structural reforms work in a healthy economy when desired effects can be achieved with incentives. When people are too sick or scared, no incentives to work, save, invest or innovate generate results. 
• Summary: India suffered its largest GDP contraction in Q1 2020 and is now one of the worst performers among G20 nations. The impact on livelihoods will be disastrous. Poor households suffered a blow during demonetisation and the effects of demonetisation lasted long. Lockdown imposed at a four-hour notice during the pandemic will also have long-lasting effects. India has not implemented any unconventional monetary policy. New spending in the Rs. 20 lakh relief package announced by the government is just 1% of GDP and total spending is less than 2% of GDP. Most advanced and emerging economies are spending 5% to 10% of GDP. The much-delayed structural reforms may never get implemented now since structural (supply-side) reforms don’t work when people are sick or risk-averse. India’Rs growth story has suffered a major setback.

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