As India’s economy shows signs of recovery, key growth ingredients missing


Higher consumption demand and sales during the festive season have bolstered India’s economic recovery path, evident from key indicators like softer second-quarter GDP contraction and growth in some key sectors. Global and domestic agencies now expect India’s economy to stage a quicker recovery while economists now say that India’s annual contraction in the current fiscal year will not be in double-digits as predicted earlier.

These predictions suggest that 2021-22 will be a good year for the Indian economy, which was left battered by a strict nationwide lockdown during the initial months of the coronavirus pandemic. Simply put, there is a general consensus that the economy will witness strong growth in the financial year 2021-22.

So, does it mean that the deep economic scars left by the pandemic will be healed soon? Not quite. While the economy has covered lost ground during the July-September period, there are many who feel it is too early to predict which road the economy would be taking.

RBI Governor Shaktikanta Das recently said that there is a need to monitor the situation despite the positive signs. While the optimism surrounding growth is corroborated by softer Q2 GDP contraction and growth in some key economic indicators, some basic ingredients are missing from the recovery recipe.

Pandemic’s impact on global economy

The economy of developed and emerging nations around the globe are intertwined, similar to how global stock markets function. When the US market falls, most markets around the world reflect the negative sentiments. A similar domino effect of the pandemic is expected on global growth recovery.

Given the ongoing global pandemic situation, fresh trade and export deals between countries have dried up and are expected to remain subdued. Some powerhouse economies are running in recession and are unlikely to strike deals with emerging nations; global exports are already sinking.

India’s economy is also likely to face headwinds due to a slower global recovery. Official data shows that the country’s exports have declined by almost 18 per cent during the April-November period. A Business Standard report suggests that India’s exports fell over 9 per cent in November — the second consecutive month of decline.

Also Read | India’s exports fell 5.12 per cent in October, trade deficit reduced to $8.71 bn

An industry expert quoted in the article said the uncertainties surrounding Covid-19 restrictions are still impacting global trade, adding that a vaccine is necessary to improve the situation.

Many noted economists have pointed out how the pandemic is an opportunity for India to become a global supplier to the world. But data from DBS Bank suggests that India has lagged behind Asian peers like Vietnam, China, Taiwan and even Bangladesh.

While India’s Commerce and Industry Minister Piyush Goyal recently said the country will meet $1 trillion export target by 2025, sharp reforms are needed if India wants to become a prominent exporter to the world, which is one of the main goals outlined in the Atmanirbhar Bharat agenda.

Higher exports would not only help in more revenue generation but also help in creating more local jobs, which is the second ingredient missing from the recovery story.

Missing jobs, lower income growth

Although the economy has witnessed a sharp recovery from the initial months of the pandemic, what remains missing from the equation is jobs and higher income growth. The Centre for Monitoring Indian Economy recently said that the correspondence between GDP and employment in India is “rather weak”.

Even before the pandemic, India GDP growth was not reflected in the number of jobs created, especially white-collar jobs that provide security and higher income.

While India’s overall rate of joblessness fell in November fell to 6.51 per cent, the rate of urban unemployment continues to remain high at 7.07 per cent, which is only a marginal decline from 7.15 per cent in October.

From a broader perspective, policymakers are cheering the lower rate of joblessness. However, economists believe that the unemployment rate should be determined with regards to the labour force participation rate or LPR.

“Labour markets have been weakening in the last four weeks. The labour participation rate and employment rate have fallen. The unemployment rate has bounced between 5.5 per cent and 7.8 per cent with an average of 6.8 per cent. But, this is almost inconsequential. What is important is that the labour markets were unable to absorb adequate proportions of the working-age population during the festive season of 2020,” said CMIE in a report on November 23.

CMIE further states that a falling LPR is a matter of concern as it implies that “an increasingly smaller proportion of the working-age population is seeking employment”.

“In absolute terms, the LPR translates into the labour force. If the LPR continues to fall sharply, the labour force shrinks. This is what happened in September 2020 after the recovery process lost steam. This labour force stagnated in October. It could be falling in November. This is worrisome,” CMIE added in its report.

Economic recovery without job creation and higher income are unlikely to impact the livelihoods of poor and middle-income groups, who suffered financially during the difficult months of the lockdown. Therefore, even if India’s economy bounces back to growth sooner than expected, it won’t mean much if there is no corresponding growth in employment and income.

“The recovery seen in the increased economic activity till September or October is running out of steam. Labour statistics indicate a substantial slowing down of the economy in November,” CMIE said.

Sustainability

The last and the most important factor which will determine India’s recovery is long-term sustainability. The economy has registered a strong recovery from the September quarter after the major loss incurred in the previous quarter, but the road ahead remains uncertain.

Much will depend on how fast the vaccine arrives in the country and around the globe for public use. Fresh restrictions in some parts of India and other countries around the world are also worrisome as it could significantly affect the sustainability of global economic growth.

Meanwhile, it is worth noting that the economic recovery story is incomplete without the all-important services sector, which has been struggling to stage a recovery. Sectors like aviation, restaurants, tourism and hospitality are desperately waiting for the pandemic situation to improve.

Whether India’s economy will continue to grow rapidly will strongly depend on factors like consumption demand and investments in key sectors.

“Both consumption and investment demand still remain significantly lower than their year-ago levels. And, future recovery remains vulnerable to a resurgence in Covid-19 cases and sustainability of the pick-up in consumption demand which contains an element of pent-up release and festive celebrations,” CMIE said in a recent note.



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