The National Statistical Office (NSO) expects India’s Gross Domestic Product (GDP) to contract by 7.7% in 2020-21, according to the first advanced estimates for GDP released on January 7. The projection is in line with various institutional and private forecasts, and paints a relatively better economic picture than the widespread consensus on a double-digit contraction up to a few months ago. While the recent recovery in economic performance — other high-frequency indicators confirm the trend — is a welcome development, it should not generate complacency on the policy front. Here is why.

Even though a 7.7% contraction sounds better than what was being predicted earlier, 2020-21 will be the worst year for growth in India. An economic shock of this magnitude is likely to leave significant and deep scars on businesses, in both the real and financial sectors, and on households. That the Indian economy was caught in a protracted slowdown even before the pandemic will make coping with the current crisis even more difficult. A large part of the Indian economy is in what is referred to as the informal sector. It is entirely possible that the economic indicators which have come in so far — the GDP projections are based on extrapolations from limited statistics — have failed to capture the extent of pain in the informal sector. Anecdotal evidence and corporate earnings for the first two quarters have highlighted how smaller entities have suffered disproportionately.

A substantial part of the ongoing economic recovery can be attributed to the fact that India has not faced a second wave of Covid-19 infections like the West. As the government gets ready to roll out its vaccination programme, the public health crisis will, hopefully, subside. However, it is also a fact that India’s fiscal stimulus was among the smallest for major economies in the world. Restoring growth going forward is going to be difficult without a big push from government spending. The Narendra Modi government has, to its credit, also unleashed important second-generation reforms in critical sectors such as labour and agriculture during the pandemic. These should generate tailwinds for future growth. But long-term expectations from these reforms can be compromised if the economy hits a demand-side constraint in the short-run. This should be the guiding principle of economic policy, especially in the next budget.

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