The economy going forward
With no signs of an early recovery, there is a strong case for a second stimulus package
The first half of the fiscal year 2020-21 ends today. The year started under a nationwide lockdown imposed on March 25. While most lockdown restrictions have been withdrawn, especially in the second quarter, the economy is far from normal. India’s GDP suffered an annual contraction of 23.9% in the June quarter. Most private and institutional forecasts predict an annual contraction in the range of 5-10% this year. Neither the government, nor the Reserve Bank of India (RBI) has a projection for this year’s GDP. In an interview to this newspaper, finance minister Nirmala Sitharaman refused to speculate on the annual performance of the economy while noting that the fall in the first quarter’s GDP was quite substantial.
At a time when the economy continues to face a difficult challenge, the government has opened at least two avoidable political fronts which will disrupt a co-ordinated response on the economic front. The first is the GST compensation cess payment controversy with the states. The second is the political showdown on the three agriculture reform bills. It is unlikely that it will have to backtrack from its position on both these issues. There is also the question of policy interventions generating confidence and clarity. The government has banned onion exports even as it celebrates its agricultural reforms as giving unprecedented freedom to the farmers. RBI’s Monetary Policy Committee (MPC) meeting was abruptly postponed a day before it was supposed to begin; the government is yet to appoint external members to MPC.
There is a consensus that a process of sequential recovery is underway in the economy and GDP growth rates will be higher than what they were in the first quarter. There are two reasons why this is not good enough. First, the challenge is to catapult GDP to pre-pandemic levels as soon as possible. Most experts do not see this happening despite easing of lockdown restrictions. The Nomura India Business Resumption Index has been increasing continuously in August and September (except a slight fall in the week ending September 27). Yet, Nomura economists continue to project a contraction in every quarter of the current fiscal year. Second, with Covid-19 showing no signs of miraculously going away, both consumer and business sentiment will remain subdued. There is clearly a strong case to be made for a second stimulus, something the finance minister said she was open to in the interview.