India’s economic growth profile will be ‘W’ shaped if the virus outbreak recurs: OECD India economist

The economic outlook is exceptionally uncertain, given how the pandemic will evolve. At the OECD, we have drawn projections for two epidemiological scenarios for each country. The single-hit scenario for India assumes 10-week general lockdown, followed by some targeted lockdowns, which will succeed in avoiding an acute health crisis. The recovery would be U-shaped, due to uncertainty over the return of working migrants, the difficulty for small businesses to finance their working capital and business closures that will disrupt supply chains. Activity is projected to revert back to the pre-crisis level only in the last quarter of 2020 and income (GDP) will fall by about 3½ per cent in FY21. In the double-hit scenario — where a second, though less severe, virus outbreak occurs in all countries towards the end of 2020 and will require a new shutdown — the Indian economy would suffer from a steeper decline in investment and consumption. Exports and remittances would also fall more than in the single-hit scenario. The growth profile would be W-shaped, with a smaller second leg but long-lasting scares. In this more adverse scenario, activity would drop by over 7 per cent in FY21 and recover gradually throughout FY21.

During this health crisis, the first priority should be to save lives and protect the most vulnerable groups. The first package, introduced in late March, had a focus, though it left many internal migrants without sufficient support. The second priority is to avoid a temporary shock — the health crisis and the lockdown that causes permanent damages. The large share of employment in MSMEs and existing financial stress even before the pandemic hit India are specific features that had to be accounted for.

The second package contains several measures to reduce financial stress and a focus on MSMEs to support a recovery in investment and job creation. It is also aimed at providing internal migrants with the much-needed support in kind, in particular with basic needs such as food.

Overall, these two packages are well focused and should be fully implemented. Their size could be adjusted to meet the needs of the most vulnerable as the health situation develops. Although India’s public debt is relatively high, more social investment and income support for the poor now could be financed in the medium run by reducing energy and fertiliser subsidies and scrapping the tax expenditures that most benefit the rich.

Supportive fiscal and monetary policy stances should be maintained to uphold the incomes of people, workers and firms left in a precarious position. Short-term work schemes and other job security and wage subsidy programmes used in many OECD countries are difficult to implement in India because of the large informal sector. Direct cash and support programmes to the most vulnerable households should, thus, be continued.

Ramping up healthcare resources by training more doctors and nurses and providing more hospital beds, will help reduce health risks, improve people’s confidence and well-being. India has a very low number of hospital beds and doctors per inhabitant. This necessitated a strict lockdown to keep the death toll low but it came at a large economic and social cost. Rebooting investment will be key to promote income and job creation in the medium run.

Newly created government-backed guarantee schemes to ease firms’ access to loans should be accompanied by a bold programme to reform and recapitalise public sector banks. This, together with an adjustment in interest rates for small saving schemes, would help improve monetary policy transmission. The authorities will also need to become more selective in supporting companies and banks. Faster bankruptcy resolution procedures would help avoid locking resources in zombie firms.

India has lagged behind on labour-intensive exports for some years. In the garment sector, India’s market share in world exports has stalled and fallen below Vietnam, even before the Covid-19 crisis despite know-how and abundance of labour. Modernising labour regulations, which currently become more stringent as firms grow, would reduce incentives for firms to stay small or rely on informal labour. This would unleash the firms’ ability to exploit economies of scale. It would also allow creating more formal jobs, lifting more people out of poverty, if accompanied by efforts to improve education and skills. Further loosening of restrictions on foreign investment and trade barriers will also be key to promote India’s competitiveness and attract investors.

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