Centre needs to do more for the economy’s recovery
Indians are perhaps among the most optimistic people in the world. The Sensex surged 362 points on Thursday, banking on a debt forbearance plan for Indian corporates announced by the RBI; investors simply ignored the dire warning by the same central banker that the real economy was shrinking and shrinking fast.
After plummeting to 25,981 points on March 23 due to Covid-19 just ahead of the nationwide lockdown that impacted economic activity, the benchmark Sensex has since boisterously kept rising except for the occasional hiccup and is now trading nearly 12,000 points higher, an increase of over 46%. In sharp contrast, according to the RBI’s statement, industrial production in India shrank by 57.6% in April and by 34.7% in May. The economy as a whole is likely to have shrunk by 20% or so in April-June 2020, according to economists.
For the full year, the economy is expected to shrink by anything between 5-10%, among the highest in Asia. The real economy had been slowing down for quite some time even before Covid-19 hit India. Demand had been shrinking as unemployment rose. By December 2019, India’s unemployment rate was already at a high of 7.6% as the country’s growth engines sputtered.
By April it had risen to 23.5%. Though things are better after the economy was unlocked, it’s still at 7.7%. The services sector, the country’s largest contributor to the economy, according to estimates based on the Purchasing Managers’ Index, improved slightly to 34.2 in July from 33.7 in June.
But it’s still way less than the cut-off level of 50, anything below which indicates a contraction. Sectors like aviation, tourism, sports, leisure, entertainment and restaurant business remain severely crippled. Hopes of a recovery hinge not only on an end to lockdowns, which may well continue as fresh waves of Covid cases crop in various parts of the country, but on efforts taken by the government to rehabilitate the economy.
It has already taken some measures including increasing credit availability, but more needs to be done. A massive spending plan to build infrastructure that could boost both employment and have a knock-on effect on demand for industrial goods may well be the New Deal that the country needs to bank on.