Economic revival may continue in long term

Sushma Ramachandran
Senior Financial Journalist

Long- and medium-term views at times appear futuristic and out of reach. One remembers John Maynard Keynes’ comment that in the long run, we are all dead. The truth is that such projections are based on the existence of many individual factors that need to remain constant over a long period. It makes formulating them a risky business.

The best illustration is the current global pandemic. Who would have projected that a contagious disease will bring the entire planet to a halt this year? No prediction for economic growth in 2020 has come true for any country. The outlook for 2021 is equally hazy at this point, despite optimistic claims of pharmaceutical companies about the progress of vaccines.

It is in this light that one must view the projections by Oxford Economics regarding the trajectory of economic growth over the next five years. The forecasting agency has revised downwards its forecast for growth in the Indian economy during 2020-25 to an average of 4.5 per cent as against its pre-pandemic prediction of 6.5 per cent.

The reasons given include the fact that there has not yet been an adequate fiscal stimulus to revive the economy battered by the effects of Covid. It also refers to the schemes and reforms announced and maintains that the government’s policy implementation record has not only been mixed but also weakened by social and institutional developments that detract from its capacity to focus on economic policymaking. It expects the factors affecting growth to worsen in the future. These include stressed corporate balance sheets, elevated non-performing assets (NPAs) of banks, the fallout in non-bank financial companies and labour market weakness.

In contrast to this gloomy outlook, we have the more upbeat assessment of the International Monetary Fund which expects the Indian economy to bounce back as early as 2021 with an 8.8 per cent growth. It also expects India’s growth in 2022 to be the highest in the world. Investment firm Barclays is equally upbeat as it has revised its forecast for 2021-22 to 8.5 per cent from seven per cent earlier.

While considering these varying estimates of the economy’s recovery from the pandemic, the fragility of the present recovery has to be taken into account. The scenario of improved indicators in the last two months is largely due to the pent-up demand surfacing and the surge of the festival season and could, thus, well turn out to be shortlived. Even last year’s spike in automobile sales during the festival season died down in subsequent months.

The Oxford Economics medium-term projection takes into account the fact that there is an underlying structural weakness in the economy that had led to the decline in growth for successive seven quarters before the arrival of the pandemic. It also accurately highlights some issues related to the implementation of reforms by the government.

For instance, it has not been able to follow up effectively after launching path-breaking reforms, like the Insolvency and Banking Code as well as the Goods and Services Tax. Both these significant measures faced major implementation hurdles, which should have been resolved without any delay.

Similarly, on the ease of doing business, the effort to reduce bureaucratic red tape began with zeal in the Modi government’s first term but has not continued with the same fervour in the second one. Other long-awaited initiatives, like the farm bills, have been stymied by opposition and protests in key foodgrain-producing states like Punjab.

On the other hand, there are some elements of the current recovery phase that are clearly likely to continue into the medium term. The first is GST collections which crossed the

Rs 1-lakh-crore mark in October, after hovering at slightly less than this level for a few months. This is a key indicator of manufacturing revival and will help in boosting the resources of both Centre and states.

The second is the rising consumption of petroleum products along with the pick-up in the rail freight movement. Neither of these is likely to slow down anytime soon.

The third is the surge in digital payments along with a veritable boom in the IT sector and software companies showing improved quarterly results. The pandemic has ended up making global workplaces more digital than ever before. And this is likely to be a permanent outcome.

The fourth is the rise in rural demand being reported by many companies, including the FMCG and automobile segments. This, in turn, is linked to a continuing rise in the agricultural output despite the lockdown. Agriculture has, ultimately, turned out to be a bulwark of the economy, even at its lowest point in the first quarter of 2020-21.

Several other economic sectors are bound to remain in the doldrums as long as Covid continues to spread its tentacles across the country. These are services sectors like hospitality, tourism and aviation, though the last is now picking up to some extent. The extent of economic revival in other sectors, however, has been much faster than expected by most observers.

It seems unlikely there will be a downswing in the medium term, especially since the upswing has been recorded when the pandemic’s impact is still at fairly high levels. The number of daily cases is currently in the region of about 45,000, though these are now on a downward curve.

There is no doubt that several negative factors mentioned in the Oxford Economics analysis will be a drag on future economic growth. At the same time, increasingly, more sectors are showing buoyancy that is looking sustainable in the medium and long terms.

This is despite the government’s apparent determination to ensure that any fiscal stimulus remains within the limits of available resources. Instead of bowing down to suggestions from many quarters to go for a broader stimulus package involving direct benefit transfers to those in need, it has opted for a more indirect approach. It has launched a big push to investment in infrastructure as well as increased liquidity to the small and medium enterprises.

This may not satisfy those who feel that there is an urgent need for more direct support, but will be invaluable in ensuring that the government exchequer remains more balanced in the long and medium terms.