Mapping recovery

India needs a new medium-term economic road map

The deadly second wave of the pandemic has upended the recovery process and output is likely to have contracted sequentially in the April-June quarter, compared to the preceding one. The IHS Markit India Manufacturing Purchasing Managers’ Index, for instance, showed a contraction for the first time in 11 months in June. Analysts noted that companies were getting worried, which resulted in a lower output projection. The eight-industry core sector showed an expansion of 16.8 per cent, year-on-year, in May because of a lower base. However, output contracted by 3.75 per cent on a sequential basis. A decline in core sector output will pull down industrial production and the overall growth number. A sequential decline in e-way bill generation in April and May also indicates lower economic activity.

There is, however, a brighter side as well. The impact of the second wave has not been as severe as last year because of localised lockdowns. Further, business activity seems to be recovering at a much faster pace with the decline in the number of cases. This has perhaps placed the government in a comparatively good fiscal position. According to the latest data, the fiscal deficit in April-May was at 8.2 per cent of the Budget Estimates because of a higher inflow of both tax and non-tax revenue. Goods and services tax collection has increased significantly over the last few months because of better compliance and the trend, according to the government, is expected to continue. Direct tax collection also witnessed a sharp increase. Besides, the government benefited from a higher than expected surplus transfer from the Reserve Bank of India (RBI).

The recovery in the current fiscal year will still depend on the spread of Covid-19. It will take a while before a substantial proportion of the population is fully vaccinated. Meanwhile, the finance ministry has asked other departments to curb expenditures in the second quarter — this does not include ministries such as health, agriculture, and rural development. The government has done well to prioritise expenditure at a time when it is running a higher fiscal deficit. Lower caseload and recovery in economic activity will also boost revenue and enable the government to spend more in the second half of the fiscal year, which will help push growth. The strong external demand and a significant increase in exports will support economic recovery. The latest Financial Stability Report of the RBI shows while the stress in the banking system is likely to increase, it will be far lower than the earlier estimates and banks will be in a position to lend. All this should boost recovery in the near term.

At a broader level, assuming Covid cases remain contained, and as more clarity emerges on the vaccination front in the coming months, the government should put in place a broad medium-term economic road map. Given the inflationary pressures, the RBI may have to roll back the level of policy accommodation in the coming quarters. Also, given the level of public debt, the government will have to go back to a clear fiscal consolidation path. While global growth is expected to remain strong in the foreseeable future, it will not automatically result in higher sustainable growth for the Indian economy. India will need a policy plan.