04 OCT,2020 | MEDC
It is now over six months since the national lockdown was imposed. The unique economic experience of that period can provide us important insights for navigating the tricky road ahead. A paradoxical phenomena was witnessed in the Indian economy… even though economic activity shrank, inflation rose. This runs contrary to textbook knowledge. The reason behind it is that even though demand was depressed, supply contracted even more in that period. Thanks to the lockdown, the movement of goods and services within the country came to a grinding halt. The aggregate supply shock was even more than the aggregate demand shock, thus leading the country into a stagflation trap.In the face of rising multidimensional poverty, the government has begun the process of unshackling the economy. An emerging market economy is structurally different from a market economy, and so India’s recovery process will be different from that of the developing world. Indian policymakers need to look at reforming the labour markets as well as corporate governance, as that is where the seeds of the nation’s economic competitiveness and social justice are laid. It is high time to phase out systems conferring unfair advantages to middlemen, as this section of society has grown for too long at the expense of the marginalized.Some experts believe that India’s recovery in organized sector jobs – both blue collar and white collar – has been slower than the recovery in the unorganized sector. As organized sector jobs are generally better paying, consumer demand has been slow to pick up. The weak labour market nudges households towards caution, and consumption remains depressed. This logic applies to both the rural and urban areas and it further reinforces the vicious circle, which will need to be broken by a concerted fiscal stimulus. Further, the pandemic has impressed upon us the need for preserving the environment, and we should be aiming at a green recovery to the extent possible.Getting back on track is not going to be straightforward, as a sense of pecuniary caution in households and corporate boardrooms will constrain domestic demand, even as the supply side of the economy recovers gradually. Given that urban centres worldwide tend to become Covid hotspots, there is a need to redesign our metropolitan architecture keeping in mind sustainable practices, which will henceforth have a key role to play in promoting regional economic growth. The pandemic will have profound implications for conducting macroeconomic policy, as both the supply and demand sides of the economy will need to be worked on simultaneously to ensure some tangible value-addition at the bottom of the pyramid.
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