Economy: Difficult Road to Recovery

Asia News Agency Editorial Board

Economy: Difficult Road to Recovery

While the Indian economy is no longer in a “technical recession” and is expected to grow at 0.4 per cent in the third quarter, as compared to an expansion of 4 per cent during the last year, the economy is estimated to contract 8 per cent in the current fiscal.

Gross value added (GVA) at basic prices registered a growth of 1 per cent in the third quarter. While only one (agriculture, forestry and fishing) out of the eight sectors registered positive growth in the first quarter, this number has risen to five in the third quarter.

Marginal growth due to low base: According to Lekha Chakraborty (professor, NIPFP and research associate, Levy Economics Institute of Bard College, New York) and  Emmanuel Thomas (doctoral fellow, CESP, JNU and assistant professor St. Thomas’ College Thrissur), “a closer look at the quarterly estimates of GDP released by the National Statistical Office (NSO) on February 26 shows that this marginal positive growth is on a low growth of 3.3 per cent registered in the third quarter last year. The next quarter will have a similar advantage as the growth rate in the fourth quarter of 2019-20 was much less than that in the third quarter. Similarly, during 2021-22 too, growth will be a significant positive number because of the unusually big base effect. The Economic Survey and the Union budget anticipates a growth rate of 11 per cent and 10.5 per cent respectively for the next year.

Will take some time to reach pre-pandemic levels: “But it is going to take a while for the economy to reach where it was before the pandemic. Even after reaching those levels, the slow growth rate is going to hurt. It will hurt those in the informal and the MSME sector the most. The income loss for them is significant. This is what we can make out from the continuing contraction of private final consumption expenditure in the third quarter too. The lost jobs in these sectors are not going to be restored automatically. The government is expecting that a new investment cycle will start soon. But it is unlikely in the presence of significant excess capacity in many sectors.”

Policy certainty a significant determinant for sustained recovery: In this scenario, “policy certainty is a significant determinant for sustained recovery of the economy. The Union budget 2021-22 is growth-promoting with an adequate emphasis on capital formation. In India, there is a fundamental rethinking about the efficacy of ‘fiscal rules’ — whether adhering to numeric threshold ratios of deficit is growth-enhancing or not. The finance minister has announced a high fiscal deficit of 9.5 per cent of gross domestic product in revised estimates (RE) for 2020-21, against the pegged deficit of 3.5 per cent in budget estimates (BE) 2020-21. However, a roadmap to bring down the high fiscal deficit to 4.5 per cent of the GDP by 2025-2026 was also announced in the budget.”

In addition, the new monetary framework (NMF) is now under review in India, and the 2020-21 Report on Currency and Finance (RCF) published by the Reserve Bank of India (RBI) recently said that “the current numerical framework for defining price stability, i.e., an inflation target of 4 per cent with a +/-2 per cent tolerance band, is appropriate for the next five years.”

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