Home / Opinion / Views /  This could yet be India’s worst economic crisis

Our editorial of 2 February on this year’s Union budget, ‘The big fiscal stimulus that could have been’ had warned of “unknowns" that could get in the way of India’s economy, among them “a virulent virus" which “could go viral across the world and warp trends". This unknown has not just bared its spikes since then, it has flared into what could be our worst economic crisis since 1947, one that threatens the dream of lifting our multitudes out of poverty. Millions have been pushed into deprivation. This fiscal year could see the economy contract by anything from 3% to 10%, as current estimates range. Its first quarter might have lost about a fifth of last year’s April-to-June output. The statistics ministry’s quarterly estimate of gross domestic product (GDP) is due out on Monday. This is a figure awaited keenly, for it shall serve as the Centre’s first official indicator of how grim the scenario is. As it would cover our lockdown period, it can be assumed to mark the year’s lowest point. Hopes of a quick bounce-back, though, seem dismal. For one, coronavirus is still not under control. The country’s count of daily cases is the world’s highest, and the blow dealt by covid-19 to demand is likely to last long after the initial shock. For another, both annual and quarterly growth had been droopy anyway. These two factors suggest we might be staring at a GDP setback worse than the 5.2% lost in 1979-80.

Recovering a GDP loss of 5% would take growth of more than 5%, as the base would have shrunk. Unless a revival is strong enough to defy pre-covid drags on growth, just getting back to 2019-20’s level of national income could prove an arduous haul that stretches beyond 2021-22. By way of covid relief, India’s central bank has eased credit vastly, while the Centre has rolled out a big package aimed at addressing multiple pain points. These have had some effect, clearly, though not nearly enough, given the scale of the crisis. Efforts are now being made to extricate businesses from a maze of curbs. Supply chains may be able to restore some of their broken links. Both the availability of money and restoration of production are crucial, no doubt. However, no real normalcy can be attained without squashing corona risks, a process that could take an entire year even after a vaccine arrives. And then, there’s the gloom over our policy response so far. Not only has it raised chances of a debt crisis ahead, its efficacy has been constrained by its over-emphasis on supply. Missing in action has been a stimulus shot that would empower people with money and jump-start demand.

Lack of fiscal space has kept a lid on treasury spending. Even with only modest rescue outlays, the national deficit and debt burden could overshoot their danger marks. Without a growth upturn, however, our prospects would surely worsen. This makes it imperative for the Centre to explore novel ways to fund a big direct dose of stimulus. It could, for instance, pledge shares with the central bank for a mega loan. No less urgently, we must reverse a multiple-year downtrend in capital formation, a decline that had foreshadowed our pre-covid growth slump. To enthuse private investment, we need a reform agenda that broadly aims to decentralize authority, grant market forces greater leeway, and let the economy allot resources more efficiently. But first, let’s boost the purchasing power of people.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Recommended For You

Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout