Editorial: India’s recovery derails

Rising unemployment and plunging demand have once again turned the spotlight on the gloomy urban economy

AuthorPublished: 27th Apr 2021  12:00 amUpdated: 26th Apr 2021  10:18 pm

Even the more conservative estimates of economic recovery in India have now gone awry in the face of the devastating impact of the second wave of the Covid-19 pandemic. The unprecedented surge across the country, at a time when the developed economies have already started recovering, could derail the recovery process and put pressure on inflation. Local lockdowns in several States, growing commodity prices, increasing global inflation and a weaker currency could further push the prices. Though there has been no full-fledged lockdown anywhere in the country and the restrictions are less severe than those imposed last year, their impact is being felt in the broader economy. The economists at SBI have scaled down the growth projections from 11% to 10.4% per cent this year. Earlier this month, the International Monetary Fund (IMF) upgraded India’s economic growth forecast to 12.5% — the fastest among major economies. However, such an optimistic project is now under severe doubt because of an unprecedented surge in infections. The Reserve Bank of India (RBI), on its part, is in a waiting mode, keeping the policy repo rate unchanged and maintaining an accommodative stance “for as long as necessary to sustain growth, while ensuring that inflation remains within the target”. The wholesale price index (WPI)-based inflation rose to an 8-year high of 7.39% in March driven by the increase in prices of fuel and manufactured products. Rising unemployment, collapsing businesses leading to reverse migration and plunging demand have once again turned the spotlight on the gloomy urban economy.

The data from the Centre for Monitoring Indian Economy (CMIE) shows that urban unemployment crossed 10% in the week ended April 18. These levels were last seen for a few months after Prime Minister Narendra Modi announced a nationwide lockdown in March 2020. The most worrying aspect of the pandemic impact is that a two-decade-long trend of poverty reduction has now been reversed and the number of people below the poverty line (BPL) increased to 50 million in India. There is an urgent need to step up the revenue expenditure targeting income support measures. This is essential to sustain sources of livelihood and contain poverty. As the Covid-19 cases keep rising, there is every possibility of State governments imposing fresh restrictions which might hamper economic activities and cause disruptions in supply chains. This, coupled with higher commodity prices, will exert upward pressure on inflation. The sharp fall in the revenues is expected to force the States to borrow more, thereby putting further pressure on bond yields. Rating agency, Fitch, which recently affirmed India’s ‘BBB-‘ sovereign rating, has warned that the outlook is negative, as there continues to be uncertainty over the country’s debt trajectory following a deterioration in public finances.


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