On the Challenges of post-COVID Indian Economy – Growth sans ‘big bang’ reforms

Source: This post on the Challenges of post-COVID Indian Economy has been created based on the article “Growth sans ‘big bang’ reforms” published in “Business Standard” on 15^th February 2024.

UPSC Syllabus Topic: GS Paper 3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

News: The article discusses the current status of the Indian economy. It also highlights the government’s response to COVID and the remaining economic challenges.

What is the current status of the post-COVID Indian economy?

1) Post-COVID Recovery: India’s GDP growth has exceeded 7% for the past 3 consecutive years. It represents a bouncing back of the economy.

2) Growth Despite External Shocks: India was faced with the Ukraine conflict and high interest rates in the advanced economies. This had led to a decrease in global growth.

3) Economic Resilience: Many analysts had warned about exchange rate and balance of payments challenges. However, that didn’t happen.

4) Healthy Banking Sector: The banking sector saw a reduction in the gross NPAs to just 3.2% of outstanding loans in September 2023.

The finance ministry ascribes the economy’s resilience to the policies pursued during and before the Covid shock.

What was the government’s policy response to COVID?

1) Modest Stimulus focusing on CapEx: In comparison with the fiscal stimulus in other economies, India’s stimulus was modest and contained a large component of capital expenditure, not transfers for consumption.

2) Localised lockdowns and nationwide vaccination helping contain infections.

3) Regulatory Forbearance: A relaxation in the supervision, oversight, and enforcement of regulations in the banking sector.

What are the remaining challenges?

1) Fiscal consolidation: India is still far away from the objective of a 3% fiscal deficit and 60% for public debt.
Lowering the fiscal deficit will be challenging as defence expenditure, phasing out of fossil fuels and investments for climate change commitments could add to the fiscal deficit.

2) Lack of Big Reforms: Reforms such as privatisation, greater freedom to hire and fire, overhaul of land acquisition rules, judicial and administrative reforms have seen slow progress.
This is because reforms must be consistent not just with macroeconomic stability but also with political and financial sector stability, and considerations of national sovereignty.

In this regard, the finance ministry indicates that high economic growth can result from less drastic reforms that are already happening: Investment in physical and digital infrastructure; improved balance sheets at both corporations and banks; technology transfers through growing FDI; investment in human capital; and an improved investment climate.

According to the author, a sustained growth of 7% seems to be the optimal outcome for India. This can be achieved with incremental reforms.

Question for practice:

What is the status of the post-COVID Indian economy? What are the issues with implementing big reforms to achieve growth?