HYDERABAD: The Covid-19 pandemic, which comes at a most inopportune time for India, may bring its real growth anywhere between 0.2 and 3.9 per cent in FY21, according to a joint working paper by economist Dr Arvind Virmani and Karan Bhasin, a Delhi-based policy researcher.
The authors estimate that GVA growth would reduce by 1.6-5.3 per cent. “Given a pre-pandemic GDP growth forecast of 5.5 per cent for FY21, growth is now forecast to be between 0.2 and 3.9 per cent with a likely value of 2.3 per cent,” they noted.
That’s because the nationwide lockdown, with exemptions for essential commodities, has shut down 60 per cent of the economy, with tax revenue, private government investment and other economic aggregates being affected.
Based on the duration of the lockdown and its likely extension, the authors have forecast three scenarios -- optimistic, likely and pessimistic -- with simulations assuming a decline of 1, 2 and 4 per cent resulting in growth rates of 3.5, 2.5 and 0.4 per cent respectively.
Unlike the global financial crisis where the financial system collapse contracted the real economy, the Covid-19 pandemic is a combination of real supply and demand shock, in turn dragging down the financial system.
Hence, fiscal stimulus with a permanent increase in government expenditure is the wrong thing to do in a lockdown, the authors stress. While the government’s relief package rightly covered two-thirds of the economy, when the lockdown is lifted in phase-2, they suggest that focus should be on industries hit both by the pandemic and the 2019 growth recession.
Lastly, they add, focus should be on speeding up the recovery in phase 3. “India’s approach to fiscal stimulus must combine economic reforms which improve fiscal sustainability in the middle-long term with short-term fiscal stimulus. Well-designed tax reforms are revenue neutral over 3 years or less,” they noted, stressing on the need for tax reforms.
“As soon as the worst of the pandemic is past, the union and state governments must introduce a comprehensive package of reforms to ensure quick recovery,” they said.
On the expenditure side, the paper sought a rethink on the welfare approach and suggested replacing price-distorting subsidies with direct cash transfers in order to allow governments to raise funds that can reach the poor.
Three scenarios
Based on the duration of the lockdown and its likely extension, the authors have forecast three scenarios — optimistic, likely and pessimistic — with simulations assuming a decline of 1, 2 and 4 per cent resulting in growth rates of 3.5, 2.5 and 0.4 per cent respectively for the financial year 2020-21.