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Address the K question

Uneven economic recovery will not be sustainable

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Business Standard Editorial Comment New Delhi
3 min read Last Updated : Jan 26 2021 | 11:16 PM IST
The Indian economy is recovering from the Covid-induced disruption and the full-year contraction is expected to be much better at 7.7 per cent than earlier forecasts. A sharp decline in new infections and increasing mobility should aid the recovery process even in the next fiscal year. The vaccine roll-out will also help contain the spread of the virus and revive economic activity. All this will provide the much-needed comfort to the government in designing future policy interventions, including those in the upcoming Union Budget. However, a recovery from the lockdown lows should not become a reason for the policy establishment to take its eyes off the medium-term challenges. In fact, the nature of the economic recovery itself needs policy attention.

The fact is that the recovery so far has been fairly uneven and is being led by profit growth. This is partly reflected in the rising stock market as well. It is also likely that economic disruption had a disproportionate impact on small-scale businesses because of their limited capability to withstand such shocks. This might have shifted production to relatively large and organised firms. Both firms and households with stronger balance sheets are doing well, but a large part of the economy continues to suffer. This K-shaped recovery may not sustain. Although this is not unique to India, the composition of the Indian economy and the informal sector’s dominance could create more complications.

Besides, the data suggests that informality has grown in the labour market after the pandemic and the economic recovery is not accompanied by a proportionate increase in labour demand. This is also reflected in continued higher demand for work under the rural employment guarantee scheme. While the unemployment rate has come down from lockdown levels, the labour participation rate has declined significantly. The data from the Centre for Monitoring Indian Economy shows that, against the level in 2019-20, employment was lower by about 15 million in December. Further, apart from lower employment, wage incomes have declined — by over 50 per cent in some cases. Corporate results in previous quarters too showed a decline in wage cost for a large number of companies. A lower level of employment and reduced wage income for a large section of the population will have implications for overall demand and affect economic recovery.

Addressing these issues would be a key challenge for the Union Budget, to be presented next week. Reportedly, the government is planning to extend relief to individual taxpayers by lowering the tax outgo. It would be well advised to avoid any such move at this point because it might worsen the problems associated with the ongoing recovery. Tax relief would primarily help households that are in a better financial position. Further, the government is not in a state to forgo revenue. It should also not get carried away with a possible increase in tax collection from a lower base. The government should aim to spend as much as possible in areas like infrastructure in the coming years. 
 
This would not only help increase potential growth in the medium to long run, but also create much-needed jobs at the bottom of the income pyramid, which will generate demand and make the recovery more sustainable.

Topics :CoronavirusIndian EconomyEconomic recovery

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