This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our PRIVACY POLICY for more information on the cookies we use and how to delete or block them.

India Economic Update

04 June 2020

Milind Kothari, Managing Partner |

The third week of March 2020 began the series of lockdowns in India; two staggering months of the most severe and stringent COVID 19 control measures taken by any country in the world. It has had major ramifications and flattened the Indian Economy to a large extent. Evidently, coming out of the lockdown is going to be an equally daunting task and quite likely, India is bracing for one of the worst recessions in its history.

On 12 May 2020, the Prime Minister of India, Mr Narendra Modi addressed the nation and announced a spending of USD 265bn or 10% of India’s GDP as stimulus to reignite growth. A significant part of Mr Modi’s speech was devoted to his vision of ‘Atmanirbhar Bharat’, or self-reliant India. He assured a quantum jump in the economy, premised on big reforms. Over the next few days, the details of the stimulus package were given out by the Finance Minister, Ms Nirmala Sitharaman. The stimulus is focused on supply-side support, largely for survival of the vulnerable sections. Following the theme of self-reliance, the measures announced are aimed at teaching Indians how to fish rather than providing them with it. Empowering the people, rather than making them dependent on state dole outs.

After all the aspects of the stimulus had been detailed, the prevailing opinion was that the actual size of the fresh stimulus was less than 1.5% of the GDP. A point in its favour, though, is that it is prudent to keep the fiscal deficit in check, with most of the actions being off-balance sheet such as credit guarantees, regulatory reliefs and steps to prevent loss of production. To view it in context, it must be realised that the annual Indian fiscal budget is just about a sixth of the GDP, which is way smaller than those of developed economies, giving little elbow room to the government to make a large contribution to revive the economy. A significant part of the package was aimed at small businesses that provide livelihood and jobs to millions. One of the efforts to support small and medium enterprises was providing guarantees for borrowings. However, as the mountain of NPAs from the previous lending has not cleared away, it is suspect, that attempts to spur borrowings through fresh lending that too at a rapid pace, would only exacerbate this space in the long run.

On a more positive note, the current crisis has thrown up a potential opportunity for the manufacturing sector in India, to change its destiny. The much touted ‘Make-in-India’ program that was initiated by the Prime Minister, in September 2014, has seen limited success. Now, with the possibility of MNCs pursuing the ‘China+1’ strategy to resolve a supply chain bottleneck in the long term, there is scope for the manufacturing sector to revitalise itself and experience growth.

To benefit from the changing landscape the government needs to make a series of moves that reflect the intent to realise potential. The efforts required are aplenty - fixing a failing legal architecture clogged with a backlog of millions of pending cases, resolving agenda items to climb higher on the ranking of Ease of Doing Business etc. The regime of permissions and approvals needs to change. Gratefully, there are examples in India in states such as Telangana, which have achieved remarkable success and efficiency in issuing such permissions in a short time. Further, the pandemic precipitated changes in labour law in states such as Uttar Pradesh, Bihar and Rajasthan which could have a far-reaching impact on the sentiment that India means serious business.

One of the major setbacks to confidence building in the manufacturing sector, is the impression that commitments made by governments are not being honoured by subsequent governments. Considerable investments are required to repair a crumbling infrastructure and bring in a level of acceptable standards to attract foreign investment. Large scale investments are also required for setting up of industrial parks and corridors. The focus should be on improving competitiveness of exports, scouting for new markets and offering better deals than competing countries in the region, such as Vietnam and Cambodia. Of prime importance would be the creation of a nodal group that would be responsible to bring this to fruition. The group must be entrusted to make quick decisions and have the mandate to commit large investments that will create an ecosystem for such investments to flourish. Easily, India has the best minds and talent to make this happen and what is required is an urgent unshackling of constraints to seize this opportunity from the present COVID crisis.

While the economic challenges in India and the rest of the globe loom large; a bigger concern is the humanitarian crisis that is unfolding in many parts of the world. There will be some misses and some gains with a lot of learning and hopefully wisdom to take this as an opportunity to treat the planet with the respect it deserves. Importantly, the human spirit is resilient, and we will come out of this albeit a little worn but shining all the same.