The Reserve Bank of India (RBI) on Friday revised its GDP growth estimate for 2020-21 to -9.5%, down from the August estimate of -4.5% given in its annual report, indicating the pain that the economy is likely to suffer this year due to the coronavirus disease.
RBI tends to be conservative with its estimates, so the actual magnitude of the decline is most likely in the double digits. That had never happened before: the previous steepest drop in growth was -5.2% in 1979-80, at a time when India’s economy was very different. Those were the restrictive days of the Raj, as it is known, and the size of the Indian economy hovered around $ 187 billion. India ended 2019-20 as a $ 2.5 trillion economy. That means that the degree of decline in the economy this year will be, in absolute terms, greater than the size of the Indian economy in 1980.
The Reserve Bank of India was not the only one to revise its estimate; the World Bank did so on Wednesday and projected that the Indian economy would fall by -9.6% in 2020-21; their June estimate was -3.2%. As the table accompanying this article shows, the general consensus appears to be shifting toward a double-digit GDP decline.
If there is a ray of light, RBI expects the fourth quarter of this financial year, January-March 2021, to see positive growth. So, especially in these times, the fourth trimester is a lifetime away.
It would be easy to blame everything on the coronavirus disease. Sure, the degree of decline the Indian economy will see this year is solely due to the coronavirus disease (and the lockdown and restrictions imposed to slow its spread). But as HT’s Roshan Kishore pointed out in an incisive three-part series in June (scan the QR code below), the Indian economy was already in a bad place before the pandemic hit. Kishore argued that the Indian economy “was likely facing a demand-driven slowdown, perhaps even structural before the pandemic” and that the government perhaps “misjudged it because of a supply-side problem.”
So where does the economy go from here? On Friday, RBI Governor Shaktikanta Das was optimistic about the country’s economic outlook, saying that as long as there is no second wave of the disease, there will be, but that is material for another column, the economy could return to its normal. previous state. pandemic trajectory.
This columnist is not convinced. The key to stimulating India’s economic recovery in the short term lies in boosting demand. It would not be good to misinterpret the current (sequential) peak in demand as something that will be sustained; part of the so-called repressed demand, people who buy things that the blockade prevented them; some of it is necessary because of circumstances (small cars, for example, as people avoid unsafe public transport); and part of it is linked to the festive season. This is beyond the scope and competence of RBI. The Monetary Policy Committee can play with interest rates, but that will not help the cause of demand in the current circumstances.
I was referring specifically to the short term because the government has pushed through a handful of long-pending second-generation reforms which, along with some measures announced in the past (such as the reduction of corporation tax), will make Indian industry more competitive and India itself is an attractive destination for businesses, even those engaged in manufacturing, but their impact will only be seen in a few years.
What India needs is a generous, demand-driven, cash-intensive fiscal stimulus, something that puts money in the hands of the people. Money is in short supply for the government at the moment, but it can find the fiscal space for such intervention simply by printing money or even monetizing the deficit. India’s first aid package just didn’t do enough. This time around, the country’s legislators would do well to listen to what Rod Tidwell (the character played by Cuba Gooding Jr) says repeatedly in the movie Jerry Maguire.
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