The latest macro data indicates that the Indian economy may be standing at an inflection point. Having survived a major accident in the form of Covid19 pandemic, the economy looks stable, having progressed well to reach closer to the pre Covid level of activity. Of course, for next few quarters the economy may still need to use the support of government spending, before the virtuous cycle of higher investment and consumption kick starts.
Post pandemic, the challenges before the
government are multifold; and so are the opportunities. A successful resolution
of these challenges could trigger a virtuous cycle of growth and catapult the
economy to the higher orbit. A failure may not be an option, as it could cause
a disaster of unfathomable proportion.
Besides, merely achieving a full ‘V’ recovery
to the pre pandemic level of economic activity will be inadequate, since pre
pandemic the economy was slowing for many years and was completely
unable to generate adequate jobs for the burgeoning youth population. The
government will need to apply multiple accelerators for the sustainable growth
to reach to the target of 8% plus.
The pandemic has widened the divide in the
society, as the recovery so far has been rather ‘K’ shaped. Income and
wealth inequalities have widened. Disparities in access to digital
infrastructure have amplified the divide in social sectors like healthcare and
education. The gap between organized and unorganized sectors has enlarged materially.
To maintain harmony and peace in the society, these gulfs would need to be
managed.
As per a study done by the Azim Premji
University scholars, “one year of
Covid-19 pandemic has pushed 230 million people into poverty with a 15 per cent
increase in poverty rate in rural India and a 20 per cent surge in urban
India."
CMIE data showed that “the
unemployment rate has gone up as high as 12 per cent in May 2021,
10 million jobs have been lost just on account of the second wave and 97 per
cent of the households in the country have experienced declines in incomes”.
The labour force participation rate was at
40.22% in the period between May-August 2021, according to latest data by the
CMIE. It has remained at about 40% since the start of the pandemic, compared to
about 43% before it. This is the lowest the labour force participation rate
has been since 2016, when data was first compiled.
Exports, one of the key growth drivers, have
persistently failed to deliver in past one decade. There is no sign of any major
improvement in exports, especially when the global growth has already plateaued
after post pandemic push. Considering that India’s capex is closely related to
exports and global trade, the probability of any material pick up in private
capex appears slim.
Poor export growth and high petroleum and gold imports have resulted in sharp increase
in trade deficit for India. Consequently, INR has come under pressure. USDINR
is its weakest level now and looking even more vulnerable given its
outperformance vs EM peers in past one year.
Persistent food and energy inflation is key concern, though other industrial input prices have shown
signs of stabilizing. Given the poor wage growth for semi-skilled and unskilled
workers, a large part of the population is reeling under the impact of stagflation,
hurting the consumer sentiments. Consumption slowdown is one of the key
economic concerns currently.
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