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Home >Opinion >Views >Our economic recovery might not be on a glide path yet

The 2020-21 mid-term review of India’s economy by the National Council of Applied Economic Research (NCAER) was not only enlightening, it allowed a triangulation with other data to get insights. This fiscal year’s second-quarter figures, after a huge economic contraction in the first quarter, may have lulled many observers to believe that our recovery is on an upward glide path. This revival may be broad-based, despite large sectoral and sub-sectoral variations, but it’s still too shallow on many fronts, and is at risk of plateauing off.

While manufacturing might have gone back to growth and services shrinkage may have moderated, some segments having worsened. Exports continue to be weak and our trade deficit has widened again. The third or fourth quarter could see our economic contraction end, and 2021-22 is likely to show a high growth rate on a low base. The good part of the story is that supply constraints have been easing and the government’s stimulus policies are taking effect. But demand-side problems stubbornly persist.

Gross domestic product (GDP) growth has been in decline since the third quarter of 2017-18. The NCAER review modelled four pathways ahead. A highly optimistic path that catches up with 2019-20 output next year, with 14% growth in 2021-22 and 7% thereafter, may take our economy out of the woods. But this is highly improbable if demand stays slow. On a pessimistic path, last year’s output level will be regained only by 2022-23, with 7% growth next year followed by an annual 4.5% after that. A more realistic pathway lies between the two, with trend growth expected to settle at 5.8% annually. But even this will take more than just macro-economic stimulus. It would need structural reforms in the financial and power sectors, as also foreign trade.

If you look at foreign trade, right from 2015, nearly 3,600 out of 5,500 items under six-digit tariff codes have undergone upward revisions in customs duty. The protectionism brought in by the Atmanirbhar Bharat policy has created autarkic impulses. India is not part of any major trade bloc either. Our export figures have been largely static over the last five years. Unless those tendencies are sloughed off and India joins trade blocs, exports may fail to perk up.

Now consider reforms. NCAER reviewed the idea of the government divesting 51% of the expanded equity of public sector banks. But this appears a long shot, given the renewed focus on state capitalism. Some reforms have been initiated in the power sector, where the financial situation of distribution utilities is parlous. In a nutshell, availing loans would require utilities to meet certain conditions, tariff subsidies will take the form of direct benefit transfers, the sector’s regulator would be autonomous, and more space will be opened up for private players. However, the plan assumes that states can be tied down by a change that makes utilities liable for legal action over any default, and this seems facile. After the pandemic, there is a slim chance of that happening, given the high debt levels of utilities and their new obligations to rely on renewable energy, without raising tariffs. Hence, a state-versus-Centre confrontation is likely, especially given the fractious relations over goods and services tax (GST) compensation and the Centre’s unilateral amendment of farm laws.

Inflation remains above the central bank’s target band, with food prices rising. Trade margins between the wholesale and retail levels have widened, so there may be little relief. Add to this high central borrowing, which was inevitable in a pandemic year. As tax revenues and other receipts have fallen sharply while expenditure has remained close to the 2019-20 figure (though spending in sectors like education, women and child development and social justice has contracted by more than 30%), the fiscal deficit is likely to be very wide. Government bond yields at the long end have faced upward pressure due to this massive increase in borrowing. While short-term lending rates have tracked the central bank’s repo rate and call rates have fallen very low, portfolio inflows have surged, raising the likelihood of rupee appreciation, containing which could cause an inflationary rise in money supply. Bank credit has been riding on personal and service-sector loans, while advances to small businesses, large industries and the priority sector decline.

With India’s debt-to-GDP ratio almost at 90%, with more borrowing to come, inflation will remain a concern. On the other hand, taxes are unlikely to show significant buoyancy, capacity utilization is below 60%, and private investment remains sclerotic.

Our immediate problem is a demand slowdown. This cannot be solved unless enough reasonably well-paying jobs, many of which have been lost, are created. If consumption stays depressed, businesses will see no need to ramp up production. We may chug along like Brazil or South Africa, but not like East Asian countries, in the near term.

The country’s top 10%, who have a disproportionate share of wealth and earnings, cannot power our growth engine until a larger number of people join our upwardly-mobile classes (with discretionary income). The calculus of economic expectations seems to be going haywire. There appears no solution in sight, and more and more people are either doing gig-jobs or just staying away from labour market. In sum, we are still far away from the revival glide path we have optimistically conjured for ourselves.

These are the author’s personal views.

Satya Mohanty is former secretary, Government of India

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