The COVID-19 pandemic continues to adversely impression lives, livelihoods, and the economic system in India, with a devastating second wave wreaking havoc at the same time as the specter of a 3rd wave looms massive. Rising uncertainty has decreased shopper and enterprise confidence. Progress over the two-year interval FY20 to FY22 may very well be zero p.c or unfavorable. This follows an financial slowdown throughout the three years previous the pandemic. With investments and commerce efficiency weak, the Indian economic system was firing primarily on consumption, which the primary and second waves of the pandemic have hit badly.
A brand new Diplomat Threat Intelligence Month-to-month Report examines the elements which can be prone to form the restoration from the impression of the pandemic and its interplay with present structural financial bottlenecks. The report relies on interviews with eight senior specialists on the Indian economic system in addition to secondary analysis.
The report identifies the next dangers as looming massive over the Indian economic system within the brief and medium phrases. Entry the complete report, which deep-dives into every of the problems recognized beneath, right here.
Quick Time period (FY 2022)
#1 A Extreme Pandemic Third Wave
A extreme third wave of the COVID-19 pandemic, which has been mismanaged by the central and state governments, places the Indian economic system in uncharted territory. Consultants expressed apprehensions in regards to the emergence of latest and extra virulent strains of the novel coronavirus, which could necessitate the re-imposition of lockdowns throughout the nation, resulting in an extra (and presumably dramatic) discount in development estimates and including to dampening demand. Complicating issues additional is the truth that, as one economist famous, it’s not identified how shoppers and households will react following the tip of the second wave: How would family financial savings be impacted? Will shoppers be reticent about spending once more?
#2 Strain on Banking Sector
The potential adversarial impression of the pandemic, particularly if a extreme third wave surfaces, on India’s already harassed banking sector, which is saddled with legacy non-performing belongings, stays of concern. Consultants concern a contemporary wave of bankruptcies that add stress to the books of economic banks, and that mortgage reimbursement schedules may very well be additional delayed. India’s non-banking monetary sector – which has historically lent to small and medium enterprises prone to be most affected by first and second wave lockdowns – might additionally contribute to the stress on the banks that lend to them. Related fears maintain about how stress on microfinance establishments might systemically have an effect on the banking sector.
#3 Coverage Uncertainty
Since his election for a primary time period in 2014, Indian Prime Minister Narendra Modi has demonstrated a penchant for dramatic coverage strikes with out factoring of their second and higher-order results. His sudden 2016 choice to scrap 86 p.c of Indian foreign money notes with a number of hours’ discover to the general public serves as living proof, together with a sudden imposition of a nationwide lockdown throughout the first wave of the pandemic final yr with out adequately calculating its financial and social prices. As such, a local weather of coverage uncertainty persists in India that grew to become as soon as once more seen by Modi’s flip-flopping vaccination coverage over the previous few months. Non-public-sector buyers proceed to be apprehensive about coverage uncertainty. That is an addition to different pandemic-related stressors to the economic system which, in flip, sit on prime of pre-existing issues (which an skilled described because the Indian economic system’s comorbidities).
#4 Inflationary Strain
Rising inflation might pose a critical threat although, as one skilled maintained, whereas inflationary stress might enhance due to provide dislocations, policymakers ought to see by them for now, except value pressures seep into the remainder of the economic system. One other skilled identified the added downside of inflation “imported” from superior economies, particularly with america’ money-printing spree to stimulate the U.S. economic system. Additionally they maintained that ought to state and central governments proceed to widen their money help packages, it is going to additionally add to inflationary stress. The potential of a “stagflationary situation,” with excessive inflation and unemployment, can’t be dominated out.
#5 Uncertainty about Non-public Sector Funding
Non-public sector funding plans are additionally prone to be affected, given uncertainty about shopper conduct. One skilled famous that the extent of the shock to shoppers from the second wave will change into seen within the second quarter (July-September 2021).
Medium Time period (Three-5 Years)
#1 Deepening Jobs Disaster
The important thing medium-term threat to the Indian economic system stays a deepening employment disaster, which prevents India from using its favorable demographics. To make sure, this downside was current even earlier than the COVID-19 pandemic hit, however the first two waves – and doubtlessly a 3rd – have severely aggravated it, with lasting impression. In the meantime, with the economic system already below appreciable stress, the foremost issue market reforms and corrections wanted to deal with the issue stay each economically and politically unfeasible. Consultants additionally identified the danger from a rising digital divide within the nation and the impact of the pandemic on India’s training system – and its cumulative impression on jobs and livelihoods.
#2 Rising Protectionism
Final yr, Modi unveiled an bold “AtmaNirbhar Bharat” (self-reliant India) marketing campaign, which many specialists concern will compound India’s rising protectionism. Whereas some specialists level to the expansion in India’s exports, others concern that additional protectionist measures might injury India’s worldwide commerce. As one skilled identified, there’s a actual threat that the Modi authorities will misinterpret the teachings of the pandemic and put additional autarkic measures in place. Members of Modi’s cupboard have already publicly expressed their misgivings about India’s financial liberalization program initiated virtually precisely three a long time in the past. If geopolitical tensions with China – India’s largest buying and selling accomplice in items – proceed to rise, it might dent commerce with that nation. In the meantime, New Delhi continues to battle to conclude free-trade agreements with main Western economies.
#3 Worsening Fiscal Outlook
India’s authorities debt to GDP ratio continues to develop, standing at 90 p.c in April this yr. On the similar time, the nation’s lack of ability to regulate its fiscal deficit and the composition of its present account deficit proceed to pose issues. Central authorities funds are additionally prone to be strained by the prices of common COVID-19 vaccination. Potential additional tax reduction, a dip in tax collections because of the impression of the pandemic on GDP and incomes, or delayed compliance as post-pandemic stimulus are added stressors on this regard.
This was an excerpt from a brand new Diplomat Threat Intelligence report on the Indian economic system and the COVID-19 pandemic. Entry the complete report right here.