Syllabus- GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
Context– India’s economy shrank nearly 24 percent in first [April-June] quarter of 2020, the most drastic fall in decades.
Reasons for GDP contraction
- Draconian lockdown– India had the most intense lockdown starting from March 25, resulting in the unprecedented suspension of economic activity in the first quarter of this fiscal year.
- Parsimonious fiscal response– Fiscal response of the free food, subsidized credit and a handful of transfers to the most vulnerable not only limited the contribution of government spending to the economy, but was also insufficient to offset the drag caused by households and firms scaling back consumption and investment.
- Low growth rate in consumption, investment and export– GDP is contracted because Private consumption, investments by businesses and Import which account for over 88% of Indian total GDP, saw a massive contraction.
Advantages of early lockdown-
- Slowed down the spread of the virus to provide extra time to resist.
- Provided extra time to ramp up the health and testing infrastructure.
- Lower death count as compared to other affected countries.
Figure regarding GDP decline due to COVID-19, economics green shoot and recovering economy in unlock phase-
- GDP being 23.9 per cent lower was primarily due to the pandemic-induced lockdown.
- India’s death per lakh is an order of magnitude is lower.
- India’s humane economic policy based on the principle that while GDP growth will recover but human lives that are lost cannot be brought back.
- The green shoots before the pandemic display that the government’s policy thrust since July 2019 was having the desired impact.
- The services sector has been most affected by the need for social distancing and the lockdown.
- The purchasing managers index (PMI), had trended up sharply with Services PMI registering the best growth by February before dropping precipitously below 50 per cent in March.
Figure 3 and table1-
- The V-shaped recovery in these indicators suggests that the government’s measures are enabling a recovery in the unlock phase.
Different Phases to return to normalcy-
- Gradual unlocking– Gradual process of unlocking, with supply-chain normalization and pent-up demand resulting in faster sequential momentum.
- Exiting from the lockdown– The post-lockdown pent-up demand typically fades, while operations plateau below the pre-pandemic levels
- Exit path from the pandemic– Going back to pre-pandemic levels either through the flattening of the curve, the emergence of vaccines or the development of herd immunity.
- Post-pandemic new normal– Fourth phase in which potential growth settles lower
Coordinated fiscal and monetary policies are required to finance higher deficits. The RBI has focused on support via liquidity in secondary markets and other regulatory measures to bring yields down, flatten the yield curve, and incentivize banks to buy more government paper. Debt monetization, as Indonesia has already done, might be the second round of defence in coming months.