Why in News?
The second wave of the pandemic is receding although it continues to have a significant adverse impact on lives, livelihoods and the economy.
Syllabus–GS3:Issues related to resource mobilization & redistribution
The statistics: –
- The overall GDP growth would be less than the earlier expectations — the GDP growth in 2021-22 is expected to be around 8 per cent.
- The level of real GDP in 2019-20 was Rs 145.7 lakh crore. At the end of 2021-22, the level of GDP may be the same or lower than that in 2019-20.
- In other words, India would have zero per cent or negative growth over the two-year period FY20 to FY22.
- This is on top of the continuous slowdown of the economy during the eight quarters preceding the pandemic.
- India may become a $5-trillion economy only in 2026-27 or beyond with the assumption of 12 per cent nominal growth in the next few years.
- In other words, much more effort is required to compensate for the lost growth and put the economy on a higher growth path.
Lessons from COVID-19’s first wave
- In the April 2021 issue of the Economy Watch, we have a detailed In-Focus section on ‘Reflecting on the COVID-19 year: losses and lessons.
- In this write-up, we have developed an Index of Relative Shock with a view to providing a comparative profile of different countries and within a country, different sectors and segments.
- We have argued that it may be relevant to measure the losses in the COVID-19 year not in absolute magnitudes but instead, in relative terms.
Impact & Issues:
- The impact of 2nd wave will be lower than 1st but it is spreading to rural areas where health infra is very weak.
- The overall GDP growth in 2021-22 would be less than the expected growth i.e. 8%, as per current data the GDP growth be the same or lesser than 2019-20.
- This means India apart from having slow down for the past 8 quarters, would have zero growth for this financial year also.
- India would take more years to become a $ 5 trillion economy, it requires much more effort to compensate for the lost growth & to put a higher growth path.
- Similar to 1st wave, 2nd wave is widening the inequalities.
- The State of Working in India 2021 report, revealed that both poverty & inequality increased during 1st wave which pushed 230 million people into poverty.
- The CMIE data shows a decline in incomes & rising unemployment during the 2nd wave.
- Currently, 56% of households reported income loss & Unemployment peaked at 14.5%, higher in rural areas.
- Recent RBI bulletin says that the impact of the 2nd wave appears to be U- Shaped where the most vulnerable are blue-collar, unorganized & front-line workers.
A 3-Pronged Approach: Steps needed for Higher Growth & Inequality Reduction:
The need is to have a Aggressive vaccination programme & improving healthcare facilities both in rural & urban areas:
- The crisis has to be used as an opportunity to revamp & create universal healthcare facilities, particularly for rural areas.
- Govt needs to focus more on reducing Vaccine inequality between urban & rural areas.
- Reducing the health crisis can lead to an economic revival.
Capital investment in infrastructure:
- The Development Financial Institution for long-term infrastructure project funding is being established.
- The infrastructure investment boost can lift the economy out of the slowdown, revive employment & reduce inequalities.
Need for Safety Nets:
- During the last 1 year, MSMEs & informal workers have been experiencing loss of earnings due to COVID waves.
- Therefore govt needs to provide safety nets in the form of food grains, expand work under MGNREGA in both urban & rural areas & undertake a cash transfer to provide a minimum basic income.
- RBI on economic growth says that the biggest toll of the 2nd wave is in terms of a demand shock as aggregate supply is less impacted.
The two views on Consumption revival:
- Once 2nd wave subsides & the majority vaccinated, consumption returns to normal levels.
- The demand will be a constraint because of loss of income & employment.
- From the present 30% of GDP, the investment has to be increased in the medium term to 35%-40% of GDP for higher growth & job creation.
- As the global economy is reviving, India needs to come out from protectionist regime & reduce tariff rates because Export is the main engine of growth & employment creation.
- Although Monetary policy is accommodative, the fiscal policy needs to play a vital role in achieving the growth objectives, jobs & equity by expanding the fiscal base.
Way Forward: –
- On economic growth, the RBI Bulletin says that “the biggest toll of the second wave is in terms of a demand shock” as aggregate supply is less impacted.
- There are two views on a consumption revival. One view is that once the second wave subsides and the majority are vaccinated, consumption will return to normal levels.
- The second view is that demand will be a constraint because of loss of incomes and employment.
- In the medium term, the investment rate has to be increased from the present 30 per cent of GDP to 35 per cent and 40 per cent of GDP for higher growth and job creation.
- There is positive news on exports as the global economy is reviving. Export is one of the main engines of growth and employment creation.
- However, in recent years India’s trade policy has become more protectionist and the country has to reduce import tariff rates.
For a more equitable post-pandemic growth, the need of the hour is to include vaccination, rural healthcare expansion & cash transfers as a part of the strategy to boost demand & address inequalities. Discuss.