India’s record contraction last quarter delays economic progress by several years and leaves Prime Minister Narendra Modi’s ambitious goals of doubling the size of the economy to $ 5 trillion nearly out of reach.
The 23.9% drop in gross domestic product in the June quarter from a year earlier, the largest of the major economies tracked by Bloomberg, prompted banks like Nomura Holdings Inc. to lower their full-year forecasts to this year to -10.8%. It also refocuses attention on the government and the central bank on the measures that can be taken to stimulate growth.
What is the impact on the long-term growth of India?
In the past, India has achieved growth rates of more than 8%, but that has steadily declined in recent years following a crisis among shadow banks that affected lending and consumption in the economy. The economic damage now caused by the coronavirus pandemic will last well beyond the current outbreak. Banks are cautious about lending, fearing a surge in bad loans, while companies have slowed lending and investments, dragging down demand.
Pranjul Bhandari, chief economist for India at HSBC Holdings Plc in Mumbai, sees the pandemic leaving an “economic scar”, with potential growth falling to 5% from 6% before the virus outbreak. Deutsche Bank AG Chief Economist in India Kaushik Das estimates that the potential growth rate could fall to 5.5% -6% from about 6.5% -7% earlier, although foreign inflows could continue as nominal GDP growth recovers towards two digits. Past recession experience suggests that “it generally takes about five to 10 years for economic activity to reach its previous peak,” said Soumya Kanti Ghosh, chief economist at the State Bank of India.
What does it mean for job creation and poverty?
Even with growth rates of 5%, India’s economy was not expanding fast enough to create jobs for the more than 10 million young people who enter the workforce each year. The pandemic has destroyed jobs and pushed millions of people into poverty. The Indian Economy Monitoring Center, a private think tank, estimates that up to 18.9 million salaried Indians, or 21% of the overall labor force, lost their jobs between April and July, along with nearly 7 million daily wage earners, such as street vendors. , street vendors and construction workers. The World Bank estimates that nearly 12 million Indians will be pushed into extreme poverty in a country where more than a fifth earn less than $ 2 a day.
What can the central bank do?
The Reserve Bank of India has borne most of the stimulus burden on the economy. It cut interest rates by 115 basis points, injected money into the financial system through liquidity operations such as bond purchases and Operation Twist, and transferred billions of dollars in dividends to the government. On Monday, the central bank took additional steps to support the bond market, giving lenders more leeway to hold government securities without marking them at current lower prices and announcing plans to inject billions of dollars in additional funds.
When it comes to conventional monetary policy, there is limited scope to do more. Banks have been slow to pass on RBI rate cuts to consumers, mainly due to excess bad debt, which has left credit growth languishing. And with inflation exceeding the upper limit of 6% of its target band, the central bank is taking a more cautious approach towards easing.
What tax options are available?
The government outlined Rs 21 trillion ($ 282 billion) in measures to support the economy through the virus crisis, but most of the steps focused on providing credit support to small and medium-sized businesses rather than providing assistance. direct, such as tax cuts. , to consumers to boost demand in the short term. Some economists argue that the government should provide a universal basic income subsidy and the RBI should finance the fiscal deficit, which is expected to more than double the government’s original target of 3.5% of GDP this year. However, the government is wary of the implications on its credit rating at a time when it is trying to open up the bond market to more foreigners.
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