Viewpoint: Rebalancing the economy

13 JUN,2021 | MEDC


 

  • As Covid enters its second year, legitimate concerns are arising about the future of the Indian economy. So far, policymakers have been agile in responding to the economic fallout of Covid, with unprecedented relief packages for hard-hit sectors and households. However, in a global recovery in which countries are rebounding back at an uneven pace, and uncertainty prevails regarding the course of Covid, financial volatility is likely to occur. This will test India’s ability in navigating a shifting landscape, managing policy trade-offs, and achieving a sustainable economic recovery.
  • India’s recovery from Covid is diverse, and eludes a uniform narrative. Different states (and even urban and rural areas within the same state) are in different stages of lockdown. The second wave is different from the first in that it is the hinterland that has borne the brunt of it. Securing adequate vaccines is only a first step. Due to threats from new mutants of the virus, we will have to weigh the many trade-offs between continued efforts to mitigate the spread of Covid – which will require maintaining economic support to households and industry – and normalizing policies and rebuilding socioeconomic resilience.Political and social support will be key to implementing structural reforms, which are now overdue. There are many areas requiring prompt policy action, although priorities vary from region to region.
  • This is also the time to strategically target private-sector support. As the health crisis gradually comes under control, the private sector needs to be more intricately involved in the formulation of national growth strategies. How rapidly this can occur will depend on the link between growth and employment in the private sector and whether India can afford to support viable industries long enough to enable them to shake off Covid-induced distress. How efficiently that happens will depend on the strength of labour market institutions, social security nets, financial and banking system regulations, and insolvency procedures for a smooth reallocation of resources.
  • Relative to developed economies, India has weaker institutional frameworks to deal with business bankruptcies. Thus, policy frameworks must be designed to reduce both risks from excessive liquidations leading to a wave of bankruptcies and the risks of creating zombie firms that operate on excessive credit support, but provide relatively little or no value addition to the economy. This is especially true for the MSMEsector.
  • Since bank-financing continues to remain more prevalent than market-financing in India, the health of our banking sector is paramount. To provide greater systemic transparencyand deal with NPA issues, bank asset quality reviews may be necessary in select cases – especially because some regulatory measures were eased during Covid. Clear communication on policy intentions,along with measures to protect the vulnerable, is also essential in this regard.
  • Beyond the immediate recovery, rebalancing the economy will entail enhancing productivity and reducing the scarring effects of Covid on investment, employment, human capital development (due to disruptions in the education system) and financial system robustness. The long-term growth payoffs from structural reforms can be substantial if they are well designed and appropriately sequenced. We trust that our policymakers will rise to the occasion. 

*Photo Credit: Google

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