A true picture of the post-pandemic future

The havoc wreaked by Covid-19 on the global and Indian economy has been well captured by the gross domestic product (GDP), unemployment and other economic data available with us today. But what are the long-term effects on the Indian economy because of the pandemic and other disruptions, such as the Russia-Ukraine conflict? The Report on Currency and Finance, published last week on the Reserve Bank of India (RBI) website, tries to understand this while also highlighting the structural problems that need to be addressed urgently.

In his foreword, RBI Governor Shaktikanta Das quotes Einstein and says that he expects “the Report to ask the right questions and provoke readers to imagine, like the team, India’s post-pandemic future”.

Mr Das won’t be disappointed — a reading of the report shows that it certainly raises all the right issues.

The section of the report that made headlines in an economic paper and generated a lot of social media interest was its projection that India can be expected to overcome Covid-19 losses by 2034-35 if it grows 7.5 per cent each year from now on. But this observation is hardly the most significant part of the report.

Of far greater import is the hard look at both the limits of the monetary policy as well as its analysis of what the post-pandemic fiscal policy should do and the mistakes it should avoid. There is a hint that the central bank is well aware that it has kept liquidity too accommodative for too long and now needs to slowly start tightening it. Much of the future boost to the economy will now need to come from the fiscal policy, the report points out. But it also observes that too much fiscal stimulus, especially if not correctly focused, could well be counter-productive. The report points out that the general government debt-to-GDP ratio of over 66 per cent typically starts hampering GDP growth. But it also realistically assesses that the debt-to-GDP ratio may well remain higher than 75 per cent for the next five years.

When it discusses the scarring of the economy by the pandemic, it doesn’t try to sugarcoat its analysis. It gives hard data on how household capital formation has dropped sharply because of the pandemic, private consumption after two years is just a shade above its pre-pandemic levels and employment and wages will take time to recover. It observes that while businesses have recovered, households have not.

There are very few issues that the report has failed to mention or explore in depth. For example, at one point, the report says that by and large companies have managed to come back strongly from the pandemic because of the fiscal and monetary stimulus provided during the pandemic. But while it points out that stronger corporations were able to take advantage of it compared to weaker ones, it possibly does not appreciate just how badly the corporate sector has been divided between the big listed companies that have mostly gained and companies in the small, unorganised sector that have been dealt a mortal blow. A deep dive into corporate filings by the stockbroking firm Motilal Oswal had pointed out that the big profits announced by big listed firms tended to mask the fact that the corporate sector was in deep trouble if the entire universe of companies, listed and unlisted, were to be considered.

Again, when the report talks about the rigidities in labour regulations in India and how reforming these could lead to much better productivity and employment, it should ideally have also analysed in-depth the danger that the accelerated adoption of technology and automation because of the pandemic poses to India’s employment generation. While it does address education, skilling, and productivity, it could have perhaps looked deeper into this area given how much it will determine both employability and productivity in the present and the future.

Similarly, in agriculture, it has not really looked at the damage that climate change could cause to crop production — and how soon the country will have to contend with this grave problem.

But these are minor quibbles about an otherwise excellent and candid report that recognises and highlights all the dangers to the economy without pulling any punches. Most of the issues it highlights and the suggestions it makes are backed by data, economic models and research papers.

The real question is whether the government can move quickly enough to address the issues pointed out — or even whether it will have the ability to address all those issues given that many of them were not caused by the pandemic but have been features of the Indian economy for decades now. The real value of the report comes from its completely honest assessment of the issues before the government, and to an extent the central bank. Recognising the problem is always the first step to addressing it.

The writer is former editor of Business Today, Businessworld, and founder of Prosaic View, an editorial consultancy