Economy

Will the vaccine cure India’s economy?

Read more at www.fortuneindia.com

The disruptions that the Covid-19 pandemic has brought barely need explanation, finding its primary reflection in the economic contraction which India has witnessed. The only glimmer of hope in these uncertain times is the promise that a vaccine against the virus will arrive soon. And that hope is slowly becoming a reality, with the United Kingdom first and now the U.S. authorising the vaccine’s emergency use.

But before hope sets in, fear factor has overtaken everyone’s mind. According to Madnesh Kumar Mishra, joint secretary, department of financial services, Ministry of Finance, this pandemic has had an enormous impact on mental health.

While speaking as one of the panellist at a virtual event organised by XLRI Jamshedpur, Mishra, who has done Ph.D. in organisational behaviour from XLRI, said that work from home will be a permanent feature in the after-Covid-19 times as companies will look at saving costs by leasing lesser office space and spending less on travel, which will, in turn, help them maximise profits. “The experience of the last few months will also result in a change in home designs as provisions for a home-office get made.”

The panel discussion titled “Economic Outlook: After The Dust Settles”, moderated by H. K. Pradhan, professor of finance and economics at XLRI Jamshedpur, had two more panellists; Soumya Kanti Ghosh, group chief economic advisor, State Bank of India (SBI), and Sachchidanand Shukla, chief economist, Mahindra Group.

On the new normal, Mishra added that the government itself is trying to cut costs as he suggested a 75% cut in the budgetary allocation for foreign travel in FY22. “The government will cut “frivolous expenditure” when all the activities are going on in the virtual mode,” Mishra added.

Calling the Covid-19 pandemic a once in a century crisis, Mahindra Group’s Shukla, said it will leave deep scars. “We will take at least eight quarters to go back to the pre-Covid-19 levels, and there will be economic consequences,” Shukla said.

On two consecutive months of the goods and service tax (GST) collections surging above the ₹1 lakh crore mark, Shukla added that GST collections need to be 2.5 times more in second half of FY21 compared to the disrupted first half. “We need a fiscal push next year and the government should just look at reviving the economy over the medium term,” Shukla added.

SBI’s Ghosh said that the recovery will be uneven, because unlike the manufacturing sector where the pent up demand after the unlocking came in to boost the sectors, the service sector doesn’t have such pent up demand boosts. In terms of the magnitude, according to Ghosh, Covid-19 crisis is much larger than the global financial crisis (GFC) of 2008. “But it emanated from outside the financial system,” he added.

And given the enormity of the challenges, Ghosh does not rule out the possibility of the combined fiscal deficit of the centre and states peaking over 12%—much larger than the 10.9% mark touched post the GFC. “But that will be manageable,” said Ghosh. He further added that interest payment of GDP is a better ratio than the debt to GDP. “The government borrowing of ₹12 lakh crore is a historically high number, but the debt will be serviced at interest rates which are at 16 year low,” said Ghosh.

Covid-19 has also brought over unprecedented change in the financial sector, Ghosh added further. There is a lag effect between the rate actions of the Reserve Bank of India (RBI) and the transmission of the same by the banking system.

Through the fight against Covid-19, the RBI, since March this year, has cut the repo rate—the rate at which bank borrow money from the central bank—by 115 basis points. The banks, on their part have reduced their lending rates by 91 basis points in the same period. Ghosh calls this the fastest transmission in recent history.

Clearly, Covid-19 has redefined all the old normals and has set new normals for the times to come. And, the uneven economic recovery that India will witness gives enough hints that the vaccine not be the panacea everyone is hoping it will be.

Read more at www.fortuneindia.com

Show More

Related Articles

Back to top button