The post-pandemic economic question

Unless there is a surge in Covid-19 deaths — India has learnt to manage its economy better in every successive wave — the economy is unlikely to suffer any unexpected shocks. This brings up the most important post-pandemic question: What is India’s growth potential and has the pandemic left any permanent scars on this ability? These two questions are inseparable because the Indian economy was in a protracted slowdown even before the pandemic. Gross Domestic Product (GDP) growth in 2019-20 dropped to just 3.7%.

Reserve Bank of India (RBI)’S latest report on currency and finance says that India can achieve a GDP growth rate of 6.5%-8.5% provided reforms are continued. These include a wide range of tasks from gradual fiscal consolidation — especially the reduction of debt-gdp ratio — to reforms in labour markets to efforts to reduce pendency in courts. The report also lays emphasis on long-term goals such as the alignment of India’s future manufacturing goals with its climate commitments. While these goals are important and desirable, implementation will also be contingent on the policy synergy between the Union and the states. While federal relations are already on thin ice, things could become worse after the GST compensation to states ends in June.

India’s policymakers must also keep in mind that the global economic situation is volatile. Global inflation could become worse once the pandemic situation improves in China and commodity demand receives a boost. External shocks can generate strong headwinds for domestic growth. India’s growth potential is perhaps still the highest among major global economies, but cannot be taken for granted.