The year 2020 is
about to end and perhaps looking back it would be a year that would be best
forgotten for all the things. The Chinese virus induced pandemic does not seem
to subside with new mutations being reported and countries going into lockdowns
ahead of Christmas. This is despite the vaccines are getting administered albeit
the baby steps in combating this disease. While experts do believe the end game
for the pandemic has begun, one has to await for some more time before any
concrete results are likely to be visible. As one looks forward to 2021, at
this stage it seems the economic recovery is still some way off across the
world. There would be a new President in the United States and it must remain
to be seen how President Joseph Biden would deal with China, the country
primarily responsible for the current global crisis, social, economic and
health.
The macroeconomic
projections for India have been less worse than anticipated. The second quarter
of the financial year 2020-21 reported a fall of 7.5% in GDP growth rate, thus
for the first time, India has officially reported recession. This came on top
of the -25% growth in GDP in the first quarter of the current financial year. It
must however be stated that the growth is due to the emergent scenario thanks
to the pandemic and not due to any underlying structural issues. The growth
will restore itself with the subsiding of the pandemic. Economists do believe that
the third quarter of the financial year would likely to see a positive growth.
However, this is likely to be very weak growth and one might have to wait for
second half of the next financial year before one sees a rebound in the economy.
while the positive growth is likely to happen, the fresh mutations will again
bring forth the uncertainty over the economic directions of the country with possibly
another lockdown in the near future.
There would be
numerous views that would emerge from across quarters experts and self-proclaimed
experts alike about the signals the macroeconomic aggregates have been giving
over the last few months or so. Yet, it would be erroneous to read much into
the signals. The economy is down. There would be increase in unemployment. The inflation
did show a rise both through the CPI and WPI prisms. However, the latest data
for CPI and WPI are indicating a possible cooling down. The monetary policy is
entrusted with keeping the CPI within a band of 2-6% with 4% on an average. The
interest rates are set towards meeting this objectives. Yet in the current
scenario wherein the firms are facing a possibility of dried up cash flows, the
interest rates would have to come down. In other words, the benchmark policy
rates and targets would have to be violated. Yet RBI has maintained a constancy
in its benchmark interest rates after a decline in the earlier part of the
year. This does demonstrate limitation of the monetary theory and by extension,
the policy in abnormal times. Therefore, it is perhaps high time of inflation
targeting as a policy objective of RBI be revisited. In normal circumstances,
it would be worthwhile, but there would be a need to revisit this. The experiences
thus obtained might be handy in evolving a new monetary policy framework in the
coming years. Interestingly, the monetary policy as a key tool in macroeconomic
policy making is of fairly recent vintage in India. The key to the current
solution however lies in the fiscal space.
The government
used the lockdown and the transition phases to bring in structural reforms
across sectors. The reforms in the farm sector have evoked opposition
especially in Punjab. The current protests would cause some impact on the
economy in the coming months. Yet any possibility of government backing down
would seriously erode the credibility of Indian reforms. There were other
reforms in labour laws too. While the reforms have been undertaken, the fiscal
stimulus has been different in its manner and approach in India unlike in the
West. In India, the focus was on the individual. While sectors got relief in
terms of interest repayments which were postponed. Some relief was given on
working capital lending. The individuals also got some moratorium on payments
of loans and credit cards. The waiving of interest rates is now under judicial
challenge.
Yet in India, what
perhaps saved the country from disaster was massive transfer schemes. The farmers
were credited money under the PM Kisan scheme. MNREGA was expanded to offer
work to migrant labour many who went back to their native states mostly in
Uttar Pradesh and Bihar. In fact both the states handled the situation very
well with low positivity rate. Many poor families became recipients of direct
benefit transfers. Through the PDS, free food grains have been provided to
families under the poverty line. This helped avoid starvation in the troubled
days. What made it possible was the foresight of linking the PDS to Aadhar. For
all the criticism, the Aadhar received from a section of the society,
numerically smaller but substantially vocal under the guise of privacy, it was
essentially a life saver along with reduction in corruption and pilferage.
Aadhar did save the PDS in the current turbulent times and the lessons learnt
from the same in all probability will be transferred into making the system
further robust. There were demands for stimulus across sectors. Yet in the
absence of certainty over the duration of pandemic, any such measure would have
had limited impact. The fiscal space would be constrained further. The need
during the lockdown and the early recovery stages rested on ensuring the people
and organizations not going insolvent. The stimulus could come sector wise
depending on the nature of the impact rather than any blanket amount being
sanctioned without linking it to the actual and prospective impact. In fact in
the US, there is still a pressing need for a further stimulus something first announced
when the pandemic was detected and restrictions began to be applied on movement
and interaction of people.
As one looks to
the 2021 with perhaps some optimism or rather the optimism being highly
cautious, it would be worthwhile to remember for all talks of V-shaped
recovery, it would be still some time for the economy to rebound. The economy
would perhaps continue to remain weak till the sectors open up. This might be possible
only with the vaccination campaign achieving a critical mass, something
expected by the end of the first half of 2021. The economic woes are driven by
an emergent context rather than any structural issues and thus not much to be
read about long term consequences.
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