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Jun 29, 2020 | Younis Bashir Lone

Economic Woes: Will it be U, V or W shaped recovery?

 

  • 14 crore people lost jobs in India
  • Pandemic has brought economic giants like the US to its knees
  • Pre-emptive lockdown ensured that our underdeveloped health system is not overburdened
  • Indian economy will recover in the fiscal year 2022: IMF
  • Kerala, Tamil Nadu, Karnataka, Haryana and Punjab contribute 27% to India’s GDP

 

The COVID-19 outbreak has wreaked havoc on economies across the world with industries shut, educational institutions closed, roads deserted, unemployment reaching an unprecedented level with 14 crore people losing their jobs in India alone. Pandemic has brought economic giants like the US to its knees. According to one analaysis the USA is expected to show a contraction of around 31 percent.

When it comes to India, Prime Minister Narenrda Modi announced a phase wise lockdown. The unlock phase began on June 1 marking reopening of major companies, markets, religious places, and restaurants so as to pick up the economic activity. Whether the lockdown yielded the desired results or not that is for people to decide on but one must acknowledge that the pre-emptive lockdown has ensured that our underdeveloped health system is not overburdened.

There is no gainsaying to the fact that Indian economy for the current financial year will suffer a non-uniform contraction. IMF has projected that Indian economy will experience a sharp contraction of 4.55% in fiscal year 2021 as compared to that of 1.9% expansion in April 2020.  The international organisation has called it a ‘historic low’ for India and has forecasted that Indian economy will recover in the fiscal year 2022 with a growth rate of 6 percent. 

Former chief statistician of India Pranab Sen argued that economy will contract for the year 2021-22 as well and could face a full blown depression (first time in the history of independent India). CRISIL (an Indian analysis company and a subsidiary of American company S&P Global) announced that this will be India's worst recession since Independence. So, the impact on Indian economy has been largely disruptive. The growth in the quarter 4 of FY20 went down by 3.1 percent according to Ministry of Statistics.

Under the lockdown less than quarter of India’s $2.8 trillion economic movement was functional. State Bank of India research estimates a contraction of nearly 40 percent in GDP in Q1 of FY 21.

Former CEA Arvind Subramanian said that India needs a total of 10 trillion stimulus to overcome the contraction. Moody’s has revised its estimates of India’s GDP growth for 2020 from 5.3 percent to 2.5 percent. India Ratings and Research also downgraded the FY21 to 3.6%.

RBI Governor Shantikanta Das also agrees that India’s GDP growth will be negative for FY21. Moody’s has clarified that the downgrading happening amid pandemic was largely driven by the “weak implementation of economic reforms since 2017” and “a significant deterioration in the fiscal policy of governments (central and state).”

Way Forward: With government announcing the new rules and lifting multiple restrictions to open different sectors so as to revive the economic activity. Interestingly Kerala, Tamil Nadu, Karnataka, Haryana and Punjab contribute 27 percent to India’s GDP. Also, by mid June unemployment levels were also back to pre-lockdown levels.

Economic recovery of India or other developing countries is different from western countries because the lack of deep pockets doesn’t provide India the luxury to bring down the interest rates to zero or print the money at their will to fill the gap. When it comes to recovery, most of the experts believe that India will have a U-shaped or Elongated U-shaped recovery. Very few suggest a V-shaped or W-shaped recovery. However, the shape will depend on overall duration of pandemic, effect on jobs, household incomes, and the extent of fiscal stimulus provided by the government.

To come out of economic crisis, India needs to loosen its fiscal condition to help the stabilize economy and recover. To create jobs, government must foster investments in infrastructure.  Moratorium on loans and provision of working capital at low interest rates will boost the business. Apart from this, reduction of the tax compliance border and providing wage subsidies directly to workers via digital payments will help the business to retain workers when there is a stressed cash flow. Government needs to strengthen its relation with states than ever before to effectively tackle this monster.

 

 

Author has done Bachelor’s, Dental Surgery, Government Dental College Srinagar

 

 

 

Jun 29, 2020 | Younis Bashir Lone

Economic Woes: Will it be U, V or W shaped recovery?

 

  • 14 crore people lost jobs in India
  • Pandemic has brought economic giants like the US to its knees
  • Pre-emptive lockdown ensured that our underdeveloped health system is not overburdened
  • Indian economy will recover in the fiscal year 2022: IMF
  • Kerala, Tamil Nadu, Karnataka, Haryana and Punjab contribute 27% to India’s GDP

              

 

The COVID-19 outbreak has wreaked havoc on economies across the world with industries shut, educational institutions closed, roads deserted, unemployment reaching an unprecedented level with 14 crore people losing their jobs in India alone. Pandemic has brought economic giants like the US to its knees. According to one analaysis the USA is expected to show a contraction of around 31 percent.

When it comes to India, Prime Minister Narenrda Modi announced a phase wise lockdown. The unlock phase began on June 1 marking reopening of major companies, markets, religious places, and restaurants so as to pick up the economic activity. Whether the lockdown yielded the desired results or not that is for people to decide on but one must acknowledge that the pre-emptive lockdown has ensured that our underdeveloped health system is not overburdened.

There is no gainsaying to the fact that Indian economy for the current financial year will suffer a non-uniform contraction. IMF has projected that Indian economy will experience a sharp contraction of 4.55% in fiscal year 2021 as compared to that of 1.9% expansion in April 2020.  The international organisation has called it a ‘historic low’ for India and has forecasted that Indian economy will recover in the fiscal year 2022 with a growth rate of 6 percent. 

Former chief statistician of India Pranab Sen argued that economy will contract for the year 2021-22 as well and could face a full blown depression (first time in the history of independent India). CRISIL (an Indian analysis company and a subsidiary of American company S&P Global) announced that this will be India's worst recession since Independence. So, the impact on Indian economy has been largely disruptive. The growth in the quarter 4 of FY20 went down by 3.1 percent according to Ministry of Statistics.

Under the lockdown less than quarter of India’s $2.8 trillion economic movement was functional. State Bank of India research estimates a contraction of nearly 40 percent in GDP in Q1 of FY 21.

Former CEA Arvind Subramanian said that India needs a total of 10 trillion stimulus to overcome the contraction. Moody’s has revised its estimates of India’s GDP growth for 2020 from 5.3 percent to 2.5 percent. India Ratings and Research also downgraded the FY21 to 3.6%.

RBI Governor Shantikanta Das also agrees that India’s GDP growth will be negative for FY21. Moody’s has clarified that the downgrading happening amid pandemic was largely driven by the “weak implementation of economic reforms since 2017” and “a significant deterioration in the fiscal policy of governments (central and state).”

Way Forward: With government announcing the new rules and lifting multiple restrictions to open different sectors so as to revive the economic activity. Interestingly Kerala, Tamil Nadu, Karnataka, Haryana and Punjab contribute 27 percent to India’s GDP. Also, by mid June unemployment levels were also back to pre-lockdown levels.

Economic recovery of India or other developing countries is different from western countries because the lack of deep pockets doesn’t provide India the luxury to bring down the interest rates to zero or print the money at their will to fill the gap. When it comes to recovery, most of the experts believe that India will have a U-shaped or Elongated U-shaped recovery. Very few suggest a V-shaped or W-shaped recovery. However, the shape will depend on overall duration of pandemic, effect on jobs, household incomes, and the extent of fiscal stimulus provided by the government.

To come out of economic crisis, India needs to loosen its fiscal condition to help the stabilize economy and recover. To create jobs, government must foster investments in infrastructure.  Moratorium on loans and provision of working capital at low interest rates will boost the business. Apart from this, reduction of the tax compliance border and providing wage subsidies directly to workers via digital payments will help the business to retain workers when there is a stressed cash flow. Government needs to strengthen its relation with states than ever before to effectively tackle this monster.

 

 

Author has done Bachelor’s, Dental Surgery, Government Dental College Srinagar

 

 

 

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