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Sunday, April 11, 2021

Why is India’s economy recovering at a slower pace?

The COVID-induced economic slump has shown its effects across the world and India, which was already in the worst phase of economic growth in the recent past, was hit hard. While the economic activities of the emerging ‘superpower’ of South-Asia have resumed, the revival has not been as swift as the government would have liked it to be and there is a hoard of reasons for that. While in absolute terms we can say it is growing, but this is not how India will ever get to normal in the near future.

India’s economy is recovering at a slower pace than expected thus stunting the growth further. Let’s find out why India’s economy recovering at a slower pace.

Signs of recovery

The Finance Ministry had recently said that the increase in consumption of electricity and fuel and that indicates growth. No one would disagree, but the growth is slow and the road back to normal seems longer than expected. The government has been talking about bringing in Foreign Direct Investment with more vigour than ever since the pandemic has hit. “We are laying a red carpet for all global companies to come and establish their presence in India. Very few countries will offer the kind of opportunities that India does today. There are many possibilities and opportunities in various sunrise sectors in India,” said the Prime Minister Narendra Modi. The consumption in the last week of June was 7.4 per cent less than in 2019 for the same time period and the similar comparison for the previous week and its counterpart in 2019 shows a drop of 7.3 per cent. Thus, there is growth. But a painfully slow one.

The migrant labour exodus — the reverse migration — was predicted to be a major setback to the Indian economy. Turns out this prediction was true. The people who went back to their native places are not too keen on coming back to the cities. The agricultural sector, on the other hand, has seen an unprecedented rise in employment. The CMIE report of April-May said that 122 million Indians lost their jobs in April but the recent report shows that 91 million jobs are back. The agricultural sector has gained a lot from this — at least in plain sight. The sector now employs 130 million people as opposed to 111 million people in the same month of 2019.

But there is a downside to this too. The agricultural sector has not expanded in the capital — the lands that are cultivated have not exponentially increased. So it is the same farm employing more and more labourers because it is the easiest and closest job to get. But more people working should mean that much more productive, right? Here’s where the problem lies. What if the farms were already at optimal capacity? What if that small piece of land only needs four workers to produce optimal output. Then including more labourers might even reduce the production. This is a classic case of what economists call disguised unemployment. But the PM thinks otherwise. “Our reforms in agriculture provide a very active investment opportunity to railways in storage and logistics. We are opening the doors to investors to come and invest directly in the hard work of our farmers,” he said.

What impact does the increase in fuel prices?

What’s worse is the timing of the increase in fuel prices. While the government increased the tariffs on fuel in March and again in May to help get more taxes to raise more tax revenue to boost the economy, it had a hard-hitting adverse effect as well. The hike in petrol and diesel prices increased the cost of transportation and this, in turn, meant that the businesses had to pay a cost that they could not afford. The transportation companies were also not in a position to absorb losses even for a day after a rut of two whole months.

What impact does the increase in fuel prices?
Representative image. Shutterstock.com/bodom

Another indication that the Indian economy is not reviving at a very high pace and that the slump still persists is the immensely low car sales even in the month of June. Maruti Suzuki, the got to brand for Indians has seen a 60 per cent drop in sales in June 2020 as compared to June 2019. This reflects on how the middle class and affluent India has been affected as well by this economic pandemic.

What about unemployment?

While the 122 million lost jobs are coming back gradually, the on-ground reality is not so rosy. There might have been a surge in hiring in the month of June after a complete lockdown for over two months in India, what needs to be seen is whether these newly hired employees are getting paid as much as they were getting paid before the lockdown or as much as they had expected to be paid. The pandemic has been used as an opportunity in its true sense by a hoard of employers to hire staff for a much lower salary than they would have had to pay if the pandemic would not have struck. While this somewhat solves the unemployment problem and provides cash in the hands of the people it will take longer to get the demand as high as it would have to be for the economy to be in a comfortable position.

The way out of this crisis, like many experts, have said, would be boosting demand. It would have been easier to boost demand by financing the fiscal deficit by printing money in a controlled manner even a few months back when the country had enough food stock to last more than a couple of months — this would have marred the effect of the initial risk of inflation. “AtmaNirbhar Bharat merges domestic production and consumption with global supply chains. Atmanirbhar Bharat is not about being self-contained or being close to the world, it is about being self-sustaining and self-generating,” Modi said in a recent address.

The failure of a few of the economic stimulus package was also to blame. And first in line are the loans announced for the MSMEs. While the loans were announced and the announcements rejoiced, when the businessmen reached the banks the story had changed. They were granted loans but were asked to pay off their existing ones first with that money. This rendered the sanctions useless. There was no use of a loan if that could not help boost production and thus the growth of the economy. A more stringent push is required to make the banks accountable for their contributions to society.

Do not have time to read? No problem. Platocast’s State Of Economy is a weekly Indian Economy podcast where we aim to provide context on the economic news of the week. Listen here. 

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