NEW DELHI: There is growing recognition that India is regaining its growth momentum as it records an accelerated pace of economic recovery from the pandemic. With the big banks, investor advisory groups and credit rating agencies revising their GDP forecasts for the next fiscal year while lowering estimates of economic contraction for this fiscal year, the rebound is surely well on track.
To be fair, some of the previous assessments were too pessimistic and assumed a gradual pace of economic normalization even as the rest of the world witnessed a faster recovery. Thus, a reassessment has been given but nevertheless welcome.
However, despite recent upgrades, many continue to challenge the conventional belief that India’s economic recovery is widespread and lasting in nature. It is important that we look at the underlying data and relate it to actions taken by the government with the sole objective of reviving the Indian economy. It is also essential to note that economic activity will generally recover faster than employment figures, as labor markets tend to lag. Indeed, most companies face costs associated with hiring (and firing) and prefer to adjust working hours before adjusting employment numbers. It is therefore encouraging to see unemployment figures, including those in urban areas, lower than they were at the end of the previous fiscal year.
There is of course the prospect of a decline in the labor force participation rate, but the labor market points to the prospect of a cyclical recovery that will result in job creation at a faster rate than previously. was initially estimated. Critically, the new scheme subsidizing part of EPFO’s contribution for unskilled workers will greatly benefit those at the bottom of the formal workforce, which in turn will have spillover effects. .
One of the reasons India’s economic momentum is likely to accelerate is the fact that most of the normalization of economic activity has been driven by the rural economy which ultimately benefited the rest of the world. ‘economy. Rural growth has gained momentum and bodes well for the Indian economy as it kicks in one of the engines. Interestingly, even when the economy was stuck, the agricultural sector grew 3.4% in the first quarter of the current fiscal year compared to 3% a year ago. In addition, we need to recognize the strong push by government to fund asset construction, whether in the form of roads or other infrastructure projects or in the form of larger allocations to the program. affordable urban housing.
One of the key elements of the government’s stimulus response that has not received sufficient attention is the design of the aid. The design is similar in size to the programs announced by other emerging markets, but the choice of instruments is in line with those deployed by developed countries. This point was effectively brought out by Niranjan Rajadhyaksha.
Essentially, this means that the government has refrained from excessive and inefficient use of public funds, as it limited its response to policies that would maximize the impact of the stimulus on stimulating growth while limiting spending to temporary budgetary commitments rather than making them permanent in nature. This is important because our 2008 response resulted in a lot of ongoing fiscal spending that led to a systematic deterioration in our macroeconomic fundamentals, leading many to characterize us as fragile economies.
In contrast, the government undertook a significant fiscal expansion combining automatic stabilizers, cash transfers, bank guarantees, increased spending under various programs such as MGNREGA, Food Security Act, and urban affordable housing measures. The fiscal component of each of these policies can be easily reversed, allowing India to reverse its fiscal consolidation path much earlier compared to some of the other emerging market economies – or even developed economies.
More importantly, India was the first and perhaps one of the few countries to incorporate deep structural reforms into its economic package. These reforms aim to unlock the potential for productivity in areas such as CPMAs, factor markets such as labor markets as well as other reforms that allow a greater private role in the economy in critical areas. such as coal, space technology, etc. These movements and their productivity gains will help India improve its potential growth rate. This means that India should be better equipped to maintain a high growth rate above 7% because of the productivity gains that will result from the proposed reforms. It will also help to reduce the budget deficit as a percentage of GDP and our public debt to GDP more quickly.
Strong macroeconomic fundamentals are necessary for sustained economic growth, and the government has focused on a set of responses that prioritizes the sustainability of growth over a rapid but unsustainable economic recovery from the crisis. These reforms will pave the way for a sustained growth rate of 7.5-8% over the next decade, paving the way for a much more robust and dynamic economy.
Vivek Singh is the additional private secretary to the Minister of Finance. Karan Bhasin is a Delhi-based independent economist.