India’s economic recovery on track, but these challenges remain

India’s second-quarter GDP data released last week indicated that the economy is on track to recover faster than earlier predicted, but experts feel that challenges are not over yet.

While GDP contraction for the year is now being predicted to be in single digit, it cannot be ignored that India has technically entered a period of recession, jolted further by higher inflation.

A survey released last week also showed that some sectors continue to face headwinds due to lingering Covid-19 fears. For instance, India’s manufacturing recovery faltered in November, largely due to rising Covid-19 infections in some urban centres of the country.

Covid concerns

The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, declined to 56.3 in November after it rose to a decade-high in October at 58.9. While the November figure remained above 50, which separates growth from contraction, the fresh decline has forced economists to question whether the recovery will be sustained over a long period of time.

Even RBI Governor Shaktikanta Das said recently that the economy is showing strong signs of recovery, but a keen watch has to be kept on the long-term sustainability of demand after the festive season.

Also Read | RBI Governor: Economy showed better than expected recovery, but risks to growth remain due to Covid surge

The festive season this year was a good one for the country as demand peaked during the height of festivities after the pandemic had brought economic growth to a standstill. While the festive pickup has boosted the economy, long-term sustainability will be a key factor aiding the recovery.

Another challenge that remains is the number of Covid-19 cases India is reporting. Although the number of reported infections is much lower than before, the country has been reporting 30,000-40,000 new cases every day with over 400 deaths. Therefore, how fast a vaccine will be available will be another key factor in facilitating economic recovery.

Pollyanna De Lima, economics associate director at IHS Mark, told news agency Reuters that a spike in Covid-19 cases and a possibility of associated restrictions could “undermine the recovery”.

It may be noted that some restrictions have already been pushed by local governments in view of rising Covid-19 cases. Containment zones are also back in focus, especially in places that are reporting a high number of infections like the national capital, Delhi.

This could be a deterrent for company operations that picked up sharply following the government’s phased unlock plan.

“Companies noted that the pandemic was the key factor weighing on growth during November, with COVID-related uncertainty also restricting business confidence,” Lima added.

India Today Insight had reported a day ago that the economy has recovered significantly during the festive season, but still remains under the shadow of Covid-19.

Demand sustainability

While a pickup in economic activity is one key facet of recovery, the more important factors are demand and investments. UBS Research recently said in a note that the Indian economy may have lost nearly Rs 20 lakh crore due to the pandemic, equalling 10 per cent of the country’s GDP, between April and September 2020.

The research note also highlighted that despite the sharp improvement in economic activity, the key services sector is still struggling. This research note and many others suggested that India’s economic recovery in the long-term will depend on employment and income growth.

It is worth noting that millions in India have lost their jobs or suffered deep pay cuts since the start of the pandemic. While some companies have reversed the pay cuts, a large number of smaller firms have not been able to do so yet. Some of thee companies have not even been able to hire new people after they were forced to let go of existing employees during the height of the pandemic.

Persistently high inflation is another factor which could disrupt the economic recovery. It is likely that the overall inflation would remain above RBI’s medium-term target of 2-6 per cent, leaving the central bank little space to ease monetary policy further.

While there is no doubt in the fact that India’s economy has sharply recovered after the pandemic, the real challenge for the concerned authorities is to ensure long-term sustainability.

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