Cautious optimism on economic recovery

The welcome to the new year was wishfully cheerful, riding more on hope than on evidence. The economic data that is coming out is still mixed, yet hopeful. But to have survived the year 2020 is itself a cause for celebration. Disease, death, economic destruction, and yet resilience, fortitude and determination, is how most people experienced the last year. Most of the country, for much of 2020, was in lockdown mode, which was progressively diluted. The lockdown is still operative in many states. It has affected jobs, income, livelihoods especially in the informal sector. The plight of the urban migrant workers in the country is now well known. The rural economy turned out to be their saviour. The adverse economic impact on small and medium businesses has been severe. The exact detailed economic picture of India’s vast informal sector becomes clear only with a lag.

The virus is still with us, although vaccinations have started. Just four countries account for half of all the Covid cases worldwide. These are the US, India, Brazil and Russia. India’s population is 17% of the world, and the country now has 13% of all global cases. Despite this sobering fact, it is also true that India managed to “flatten the curve” much better than the other three countries. All three till recently were registering ever increasing daily numbers of the infected and fatalities. India’s declining daily count for the last couple of months is remarkable, given the much lower state of health infrastructure. Perhaps the management of the pandemic has improved considerably, as also patient recovery rates. There may be an element of inbuilt immunity that we don’t know. As of this writing, the government has given an emergency approval to two vaccines that are yet to finish the final phase of their clinical trials. The pace at which leading scientists of the world managed to develop a vaccine is nothing short of spectacular. It is also testimony to the benefit of global collaboration in science and of openness in the digital age.

The economic revival, which is now visible, is also remarkable, because it has been achieved with much less fiscal stimulus as compared to other countries. The comeback signs are evident in corporate profitability, sporadic cases of revival in the real estate sector, rising collections in GST, much higher sowing area for the rabi crop, and an increase in employment numbers. This year, India will end up producing a record 301 million tonnes of food grains, and next year, too, the outlook for agricultural growth is 3.5%. The Union Budget, due in less than four weeks, promises a strong dose of fiscal stimulus through infrastructure, and of course a beefing up of health and education, which are part of the soft infrastructure.

The stock market continues its gravity-defying rise, as if it is completely oblivious to the underlying economy. We know that the stock market is forward-looking and not myopic, but its vision seems to be far out into the future! The government must find a way to tap into the wealth of the stock market to fund its stimulus requirement. The buoyant markets are also an opportune time to divest government holdings in the public sector enterprises already identified by Niti Aayog. Another way is to pledge the PSU shares, currently valued at more than Rs 15 lakh crore, to the RBI in a sweetheart bilateral “loan against shares” deal, priced at a low interest rate of just above the repo rate. These shares can be pledged for a period of five years and then swapped back.

The optimism about the new year should not, however, distract us from some difficult challenges that will need urgent attention. Firstly, there is the crisis around the new farm laws. The agitation led by farmers is more than a month old, and their demand for repeal seems to be increasingly non-negotiable. Their apprehensions are very real, whether the concerns are about minimum support prices for wheat and rice, or legal protection available when contracting with large corporates, or protection from downward price spikes. The government must find a face-saving way to end the agitation since it is now not just affecting the farm sector in the North, but also has disrupted the flow of coal, fertiliser and other railway freight. This will surely affect industrial production and sentiment in the northern states. An early resolution is critical. Why not explore the possibility of keeping the laws in abeyance, refer them to a parliamentary standing committee, and in the meantime let individual states, aligned with the ruling party, go ahead and implement them, if politically feasible?

The second big challenge is in banking. The KV Kamath committee had identified 26 sectors where loans will have to be restructured, without the respective borrowers being pushed into bankruptcy. The total identified loans under stress were about Rs 48 lakh crore. But as the period of moratorium ends, only a tiny fraction of these borrowers has come forward to take up the offer of restructuring. Do we interpret that to mean that most of the stressed borrowers have become profitable? Or are there some deeper yet to be discovered problems? The last thing we need is another bank failure. In fact, in the Union Budget, the finance minister will have to make large allocations to recapitalise public sector banks, especially after the devastating impact of the pandemic. For India to grow at 8-9%, bank credit must grow at 18-20% at the very least, and that calls for a substantial risk capital injection. Where is this going to come from?

Beyond the anti-farm law agitation and imminent banking challenges, there is also the need to give a big boost to exports. The new foreign trade policy will be unveiled shortly after the Union Budget. We have lost the export momentum of the past in the last five years with a current situation of nearly zero growth.

There is no doubt that 2021 will be a much better year than 2020, and we should use it as a bridge to get back to high, sustainable, inclusive and greener growth.

(The writer is an economist and Senior Fellow, Takshashila Institution)(Syndicate: The Billion Press)