There has been a renewed discussion on India’s economic prospects following the announcement of the first quarter (Q1) figures. With the second quarter (Q2) over, there are signs of economic recovery, yet there are concerns regarding our economic recovery.
Many are talking about the prospects of a ratings downgrade, return of inflation, a depreciation of the rupee and a current account deficit.
Macroecon 101 tells us that all of them cannot happen at the same time, and thus, people are perhaps too quick to pass their judgements even without considering elementary economics.
A tentative forecast for our growth in the second quarter will be provided and should be a subject of a later debate. However, it is important to dispel the gloomy picture.
That India’s growth will recover due to a confluence of various factors is given. For starters, the unprecedented levels of fiscal support by other countries would result in a faster recovery in their domestic economies which would in turn support our exports.
Sectors such as pharmaceutical, information technology and to some extent, textiles would benefit from both the strong fiscal measures by foreign governments and the renewed focus for diversification of their supply chains.
Some of the underlying trend seem to suggest this shift is underway and it will gain momentum over the coming few quarters. This essentially means that India could get a bigger share of the global manufacturing in some of these sectors in subsequent months which augers well for further diversification of our manufacturing sector.
The high-frequency indicators have also revealed restocking of inventory taking place across domestic supply chains — which is a healthy sign. Thus, H2 (second half) of the financial year would possibly be a different situation altogether for India.
In fact, our second quarter growth itself could be a surprise for many who have taken an extremely negative view following the lockdown quarter growth figures.
The key narrative, however, has been that the economic performance has been abysmal over the last six years, and that Covid-19 has only made it worse. This is wrong, and is perhaps intellectually dishonest as India’s economy was growing close to its potential rate except for minor shocks until as late as the second quarter of 2018.
Thus, what went wrong went wrong in 2018, and we wrote about it successively as we documented how the Monetary Policy Committee’s (MPC’s) ill-conceived rate hikes resulted in a significant growth slowdown.
With accommodative monetary policy and a less hawkish fiscal policy, there is no reason that India’s growth will be any less impressive as it was in the recent past.
To put things in perspective, the fiscal intervention provided by the government during the pandemic focused on the poor, and the rural sector. Interestingly, rural economy grew at 3.4 per cent in the lockdown quarter as against 3 per cent in the same quarter in the preceding year. This demonstrates the efficacy of the transfers undertaken by the government, and a spillover from the rural sector to certain parts of the economy seems to be underway.
But, more importantly, what is missing from the global narrative on India is how the country undertook one of the steepest corporate tax cuts in the twenty-first century in 2019.
Moreover, there is little discussion about the strong structural reforms whether in the public distribution system to reduce leakages, the labour reforms or the agricultural reforms, or allowing for greater role of private sector in areas such as defence, space or even coal.
These are some of the reforms that have been on the wishlist of every reformer for many decades – and all of them have been unleashed in a short span of six months. This comes in the backdrop of successive efforts to improve India’s ease of doing business since 2014.
The fact is that India in 2020 is a lot more investor-friendly than ever before and it is swiftly adapting to a modern economic system that allows greater space to be made available to the private sector. Yet, many refuse to document these changes for reasons better known to them.
What is worse is the narrative that bringing in too many reforms at once could also be counterproductive. One wonders, if there is any empirical evidence to back this claim, as I personally would be interested in the economic rationale behind such an occurrence.
Indeed, there is a short-term cost of reforms on growth, however, they are prevalent for structural reforms such as insolvency and bankruptcy code or the goods and services tax. Reforms such as labour law reforms, agricultural reforms and greater FDI in sectors are not the kind of reforms that would have a short run cost.
The other issue that is missing is that while many, including ratings agencies have argued for reforms, they have been missing in acknowledging that India is the sole economy which has undertaken economic reforms as a part of the Covid-19 pandemic response package.
More importantly, they must factor in the implications of these reforms and the resultant productivity gains for the Indian economy which would result in a marginally higher potential rate of growth.
That is, India could invariably grow at 7.5 per cent or more in the medium term due to these reforms and thus, any analysis of our public debt figures should consider the possibility of a swift recovery to 7 per cent growth rates over the next few years. Such an assessment reveals that there continues to remain further fiscal space with the government to provide a fresh stimulus.
One hopes that over the course of next few months, many would recognise the silent revolution that is underway in India as it combines strong macroeconomic policy support with productivity enhancing economic reforms in the middle of the pandemic. India’s experience could well serve as a lesson for other countries to examine in situations of economic crisis.
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