A reality check on the economy
Economic data presents a challenging picture. Don’t delay a second stimulus
India’s GDP contracted by 23.9% in the quarter ending June 2020. The government has argued that a V-shaped recovery is underway in the economy. But almost all institutional and private forecasts do not support this claim. The Asian Development Bank (ADB) expects the Indian economy to contract by 9% in 2020-21. ADB had projected a 4% contraction in June. On September 14, S&P projected a contraction of 9% for the economy, from its earlier forecast of a 5% contraction.
Most experts also warn that even the sequential recovery in the economy cannot be taken for granted. The Nomura India Business Resumption Index (NIBRI) reached its highest post-lockdown level in the week ending September 13. However, the Nomura report raises questions on its sustainability given the continuous rise in Covid-19 infections. In addition, rising inflation poses another challenge to economic recovery. Headline retail inflation clocked a 6.7% growth in August, making it the fifth consecutive month when inflation was above the upper bound of Reserve Bank of India (RBI)’s comfort level. Food prices and necessary services such as transport and communication are driving up inflation, even as the market for mass consumption goods such as apparel continues to be weak. Consumers are clearly facing a double whammy of squeeze on incomes and job losses along with a rise in price of essential commodities and services. And till this situation is reversed, the economy, across sectors, and citizens, across age groups, regions and classes, will suffer.
Given these disconcerting facts, many — including this newspaper — have suggested a fiscal stimulus to boost economic activity. However, the fact that the supplementary demand for grant moved on the first day of monsoon session asked for a net additional spending of ₹1.67 lakh crore suggests that there are no immediate plans for another stimulus. To be sure, the government has not ruled one out. In July, the chief economic adviser said that the second round of stimulus might be timed when the Covid-19 vaccine becomes available. What needs to be understood, however, is the fact that delaying the stimulus might make things worse. Unless there is a focused intervention in the economy, both business and consumer sentiment will continue to deteriorate, eclipsing prospects of any credible recovery.