Weak growth, resistance to reform and scepticism about trade threaten India’s Covid-19 economic recovery

India’s call for economic self-reliance must go beyond nationalism in disguise. The push to go local appears a simplistic strategy for import substitution that is inconsistent with an outward-oriented trade policy

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People walk through a shopping centre in Thane on the outskirts of Mumbai on December 18. India is in economic recession after two successive quarterly GDP contractions. Photo: AFP

Published: 10:15am, 23 Dec 2020Updated: 10:15am, 23 Dec 2020

Covid-19 has severely damaged the Indian economy. The nation is in recession after two successive quarterly GDP contractions, of minus 23.9 per cent and minus 7.5 per cent. The prospects of a robust revival in growth appear uncertain, given structural problems with the economy.

The Reserve Bank of India feels that “the economy is recuperating faster than anticipated” and expects GDP growth to turn positive in the coming quarters. Overall, though, it still expects the gross domestic product for this financial year to contract by minus 7.5 per cent.

Covid-19 hit India when it was already in an economic slowdown, following a deceleration in GDP growth in seven of the eight successive quarters since March 2018. The slowdown was a result of disruptive economic policies like the demonetisation of the Indian currency and a patchy roll-out of the goods and services tax (GST). The poor health of Indian banks perpetuated the economy’s sluggishness.

Today, Indian banks continue to bleed, with bad loans affecting their ability to lend. The decision to defer outstanding loan payments following the cash crunch inflicted by the Covid-19 lockdown has only made the situation worse. This can restrict the kind of investments required to kick-start an economic revival.

A man chats on the phone near the Reserve Bank of India head office in Mumbai in October 2017. In the wake of the pandemic, the central bank gave borrowers a six-month freeze on their loan repayments, which ended on August 31. Photo: AFP

Reviving investment and consumption demand, and accelerating output growth, require enabling policies. Major reforms in product and factor markets are essential in this respect.

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