- Prime Minister Narendra Modi expressed the importance of looking after economy alongside fighting the pandemic in his video conference with state chief ministers.
- Multiple agencies have drastically cut their growth outlook for India.
- The mandate to fix the economy now needs to come to the forefront to address the short, medium and long term issues that the country will face.
While India is prioritizing public health over saving the economy, the effect of the lockdown is weakening India’s financial health. India’s chief economic advisor, Sanjeev Sanyal, told Kotak Securities that the government is prepared to deal with the long term impact. It may even announce medium-sized relief packages to rebuild what has been lost.
The relief packages will be structured in such a way that they can benefit from the new opportunities that may arise from the global order.
Why is the economy key for Modi?
When India entered the lockdown, it was already facing an extended balanced sheet and excess deficit. Meanwhile, businesses are having a tough time keeping their heads above water. The lockdown has barely left a quarter of the $2.8 trillion economy, functional.
For most of them, even though the inflow cash has dipped by 10-15%, the cash outflow still remains around 30 to 50% of pre-pandemic levels, according to Rashesh Shah, the Chairman and CEO-Edelweiss Group.
Even though no one saw the Coronavirus pandemic or its effects coming, it doesn’t change the fact that one of Modi’s primary mandates for getting re-elected for a second term was India’s economic growth.
That mandate now needs to come to the forefront to address the short, medium and long term issues that the economy will face. The Reserve Bank of India (RBI) announced multiple measures at their end, but those may fall short if government policies aren’t coordinated for the benefits to flow down to actual consumers.
The effect is reflected by most agencies slashing their growth estimates for the economy. Fitch Ratings took its original estimate of 4.9% for 2020-21 and cut it down to 0.8% citing an ‘unparalleled global recession’. According to the agency, the contraction is largely due to a projected fall in consumer spending.
The Asian World Development Bank (ADB) is a little more optimistic estimating that the country may be able to post a 2% increase in growth. However, even that number is the lowest that India has seen since its economy was liberalised back in 1992.
Moody’s Investors Services was one of the first to slash their estimates for India — by more than half — from 5.3% to 2.5% citing an ‘unprecedented shock to the global economy’.
While the final estimates from the agencies may vary there are two things that all of them largely agree upon. Growth in the Indian economy was already slowing down ahead of the pandemic and will remain subdued in the coming financial year. However, the country has the potential to come back even stronger in the next financial year by benefiting from the advantages of new world order, if they can fully utilise them.
See also:
India’s principal economic advisor reveals what the post-COVID reforms could look like
Fitch cuts Indian growth forecast to 0.8% for FY21 over Covid-19 disruptions
India may post a GDP growth of 2% in 2020-21, the slowest since the economy was liberalised 30 years back