The Indian economy may take more than a decade to overcome the losses caused by the outbreak of COVID-19 pandemic, according to Reserve Bank of India’s (RBI) Report on Currency and Finance (RCF).
“The pandemic is a watershed moment and the structural changes catalysed by the pandemic can potentially alter the growth trajectory in the medium term,” the authors observed.
“The pre-COVID trend growth rate works out to 6.6% and excluding the slowdown years it works out to 7.1%. Taking actual growth rate of (-) 6.6% for 2020-21, 8.9% for 2021-22 and assuming growth rate of 7.2% for 2022-23 and 7.5% beyond that, India is expected to overcome COVID-19 losses in 2034-35,” they said in a chapter titled “Scars of the pandemic”.
“The output loss for individual years have been worked out at ₹19.1 lakh crore, ₹17.1 lakh crore and ₹16.4 lakh crore for 2020-21, 2021-22 and 2022-23, respectively,” they added.
The theme of the Report for 2021-22 is “Revive and Reconstruct” in the context of nurturing a durable recovery post-COVID and raising trend growth in the medium-term.
“The report reflects the views of the contributors and not of the Reserve Bank,” the RBI said.
As per the RCF, a feasible range of medium-term steady GDP growth in India works out to 6.5%-8.5%, consistent with the blueprint of reforms and ‘timely rebalancing of monetary and fiscal policies will likely be the first step in this journey.
Stability as pre-condition
Highlighting that price stability was a necessary precondition for strong and sustainable growth, the authors stressed on reduction of general government debt to below 66% of GDP over the next five years. This is important to secure India’s medium-term growth prospects, according to the report.
Some of the structural reforms that have been suggested include enhancing access to litigation free low-cost land; raising the quality of labour through public expenditure on education and health and the Skill India Mission; scaling up R&D activities with an emphasis on innovation and technology; creating an enabling environment for start-ups and unicorns; rationalisation of subsidies that promote inefficiencies; and, encouraging urban agglomerations by improving the housing and physical infrastructure.
According to the report, India suffered among the biggest pandemic-induced losses in the world in terms of output, lives and livelihoods, which may take years to recover.
“Economic activity has barely recovered to pre-COVID levels even after two years. India’s economic rebound also faces difficult challenges from the legacy of deep-rooted structural bottlenecks as well as the scars of the pandemic,” the authors said.
“The Russia-Ukraine conflict has also dampened the momentum of recovery, with its impact transmitting through record high commodity prices, weaker global growth outlook and tighter global financial conditions,” they added.
The authors pointed out that concerns surrounding deglobalisation impacting future trade, capital flows and supply chains had amplified uncertainties for the business environment. They also highlighted that against this backdrop, India’s medium-term growth outlook hinged critically on policy measures to address structural bottlenecks and harness emerging new growth opportunities.
“The thrust of public policy action is now progressively shifting to revitalising growth – even as the fiscal policy stance aims at regenerating the capex cycle, monetary policy remains accomodative while focussing on the withdrawal of accomodation to ensure that inflation remains within the target going forward, while supporting growth,” they said.
As per the report, balance sheets have coped with the pandemic by deleveraging and increasing liquid assets, but investment appetite that should motor a renewed capex cycle is still weak.
Frail household balance sheets and labour displaced from contact-intensive activity had impacted consumption demand and quality of capital, the authors said.
In the foreword to the report, RBI governor Shaktikanta Das said it was not enough to stabilise the economy and pull it out of the depths to which it had plunged during the first wave of infections and the dents made by the succeeding waves.
“The challenge is to generate a virtuous cycle of greater opportunity for entrepreneurs to innovate and invest; businesses to attract more capital and technology; and fiscal space to manage the distributional effects of the pandemic while expanding public investment in physical infrastructure and human capital,” he said.