It’s a time of reckoning for the economy
by Venky Vembu* The government has articulated a belief that a V-shaped recovery — suggestive of a sharp rebound in economic growth — is in the works
* There’s still no knowing how the double squeeze — on the demand (consumption) and supply (production) side — as a result of the pandemic will impact the inflation dynamics
* A recent report by the McKinsey Global Institute observed that India is at a “decisive point” in its journey, and the economic crisis induced by the pandemic could “spur actions that return the economy to a high-growth track”
Former US President Ronald Reagan, who somewhat improbably majored in economics, used to famously jest that you could line up a thousand economists end to end — “and they still won’t reach a conclusion”. The incapacity of practitioners of the Dismal Science to offer anything resembling unanimity of opinion is, of course, legendary. Which is perhaps why even last fortnight’s imprint announcing the most severe economic contraction in India’s history — by 23.9 per cent of GDP in the first quarter of this fiscal year — has not had a cementing influence on scholarly opinion on the outlook for the future.
It is true that a preponderance of economists have acknowledged the unmatched gravity of the situation, precipitated by the extreme Covid-19-induced lockdown; but several other strands of outlier opinions have made bold to lay out the contrarian case that “it’s not all gloomy on the economic front”. The government, too, has articulated a belief that a V-shaped recovery — suggestive of a sharp rebound in economic growth — is in the works; it points to a string of high-frequency economic data in support of its claim. But the validity of that belief rests on infirm foundations, and will be tested in the coming months if the spread of the coronavirus infections isn’t tamed.
Of additional concern is the very real risk that the economic shock, and the policy responses to it, could weaken the two pillars pivotal for a sustainable recovery: Fiscal prudence, and an institutional mechanism for orderly resolution of bankruptcy and insolvency proceedings. Since 2014, when this government first assumed power, it had made considerable headway in restoring public faith in its commitment to both those policy objectives. Even when there were slippages, that faith was never seriously tested.
Two of the more troublesome ‘legacies’ that the NDA government inherited in 2014 were the blotted balance-sheets of banks — the overhang of borderline reckless lending following the 2008 financial crisis — and a high-inflation regime. The formalisation of the Insolvency and Bankruptcy Code had, over time, strengthened banks’ capacity to move against wilful defaulters, despite the frequent resort to legal diversions to throw a spanner in the works. And on the inflation front, the NDA government had commendably bent the monetary arc towards a low-inflation, low-interest-rate regime.
More recent interventions, however, have given room for a sense of disquiet that the progress made on both those fronts could be undermined.
The crisis and the extraordinary policy responses it has compelled threaten to reverse some of the gains in those spaces. The government’s readiness to nudge the Reserve Bank to provide liquidity to keep businesses afloat has been widely welcomed, but it has also meant a tolerance for a slide down the slippery slope of risk-laden lending practices. There is also an ongoing effort to restructure the loans in an orderly fashion, but as the recent revision of priority-sector lending norms suggests, the pressure on banks to open the liquidity tap — and lend even to start-ups, which are typically borne aloft by risk capital — may end up sowing the seeds of the next crisis.
There’s still no knowing how the double squeeze — on the demand (consumption) and supply (production) side — as a result of the pandemic will impact the inflation dynamics. Textbook wisdom suggests that in times of income uncertainty, such as we are living through, consumption tends to be ‘elastic’: That is, consumers cut back on discretionary spending. However, anecdotal data suggests that this may not have played out as forcefully as predicted — even if we haven’t witnessed the same level of ‘revenge shopping’ that other societies have seen, where populations that had been cooped up for months returned to their shopping binges.
At the macro level, too, there is an element of uncertainty about the potency of the government’s firepower to respond to the crisis. That it will be constrained by an anticipated depletion in tax revenues is self-evident, as is its incapacity to sufficiently prime the pump of public spending in order to create demand.
Bad as the economic situation may be, the government is not lacking in conceptual ideas to address the crisis. As a recent report by the McKinsey Global Institute observed, India is at a “decisive point” in its journey, and the economic crisis induced by the pandemic could “spur actions that return the economy to a high-growth track”. A reform agenda could be implemented in the next 12 to 18 months “to pave the way for economic growth in the coming decade,” it noted.
The options have never been more stark. There is a tide in the nation’s affairs, which — taken at the flood — could lead on to fortune. But letting this opportunity slide could, as the McKinsey report cautions, risk a decade of economic stagnation.
For sure, advancing such a reform agenda requires all the cogs in the federal arrangement — the Centre and the states — to work together. A fractious polity such as ours admittedly has a bad record on cooperative federalism, and the ruling dispensation at the Centre may have tested the limits of its political goodwill — most recently with its reluctance to make good the shortfall in the states’ share of revenue from the Goods and Services Tax. But all is not lost; as has been said, complex political systems will do the right thing after all other options have been exhausted.
Venky Vembu is Associate Editor, BusinessLine;
Email: venky.vembu@thehindu.co.in