It is clear that Covid-19 pandemic has damaged the economy more than the Great Recession of 2008-09. The pre-pandemic slowdown only made the amplified of the pandemic on the economy. We do not know how long this pandemic will last, but it is certain that policy-makers will have to deal with its after-effects for a long time. This unprecedented crisis has forced all countries to face their weaknesses on all fronts. What challenges is India facing in this pandemic?
India’s rising fiscal deficit in the pandemic
India’s fiscal deficit is already very large, and will continue to grow as the pandemic stretches on. Though the lockdown is being lifed in a phased manner, we cannot expect things to go back to normal anytime soon. Consequently, government revenues will start to fall. Further, the actions required by the Government to mitigate the impact of the virus will only invoke more borrowing. This increase in spending increase interest rates. This is unfavourable when businesses and households will need to borrow to deal with the situation. It also reduces the Government’s credibility, and India’s sovereign rating. This will further deter foreign investors from the Indian capital market.
India’s inability to attract foreign investment
Despite India’s efforts, it has failed to attract adequate foreign investments. The Make in India policy allowed upto 100% foreign investment in several previously closed sectors. However, it did not receive the expected success due to several constraints. These include inadequate infrastructure, high tariffs, restrictive labour laws, high corporate tax rates, exit barriers, lack of transperancy, among many others. While these factors still remain, the slowdown cause by the lockdown, along with the uncertainty that comes with the pandemic will only further push away foreign investments.
The Government must ease its FDI policy, and enforce transparency in the investment process to attract the needed investment.
Migrant crisis in the pandemic
Migrant workers are facing severe challenges as workplaces have closed down. On top of the health scare, they had to deal with food shortages, loss of income, and uncertainty of their future. Before the Government arranged transport, many started walking back home as they were at risk of starvation.
This crisis has highlighted the raging regional inequality that prevails in India. Workers must travel across states to find work, even for meagre wages. This is a result of weak condition regional and state governments and their inability to provide employment. This situation worsened by the absense of migrant-friendly rules and policies in the thriving states. They are often denied healthcare services, housing and even adequate food, since they work in the informal sector. India also has stringent and complex labour laws, that only add to the agony of these workers. The Government offered some relief to the workers. But it has not yet addressed the underlying issue of regional inequality and inefficient labour laws.
Unsupportive behaviour towards MSMEs
MSMEs are the backbone of the economy. In 2018-19, there were 6.34 crores MSMEs in India, with 51% located in rural areas. They are a important source of livelihood and employment. They contribute almost 30% to the GDP and more that 45% to its exports. Because of their small scale of operations, they are severely hit by the lockdown. The stop on production, combined with the dip in demand have forced some MSMEs to close down.
Despite their vital role in the economy, government policies and banks have a conservative approach towards lending to these enterprises, even before the Covid crisis. One reason for this is that they are out of the formal system. Their small size exempts them from GST payment and other formalities. This may help in cost-reduction, but it works against them as it restricts the Governments ability to help them. In addition, banks’ are unwillingness to lend to them, due to a lack of collateral, and a bad history of bad loans with MSMEs.
The Government and RBI have introduce some ad-hoc relief measures to them, including emergency credit, loan moratoriums and deferred interest payments. Further, the Small Industries Development Bank of India (SIDBI) announced concessional interest rates for MSME loans, which will be provided within 48 hours with minimum paperwork and no collateral.
Border Dispute with China
The recent border issue with China has heightened the prevailing uncertainty. The military stand-off between the two countries has created a sense of anti-China sentiment among Indians. However, #boycottchina is difficult for India, since the economy is dependent on Chinese products. China accounts for 14% of Indian imports, for which Indian alternatives are not available or are too expensive. Even if we do boycott these products and produce them locally, we will still have to rely on the supergiant for machinery and raw materials.
From before the outbreak, many Indian producers have suffered from supply chain disruptions due to controls imposed on Chinese imports into India. India tightened investment regulation, mainly targetting China in April. This current border dispute escalation will only create more problems for the economy.
The pandemic has an unforeseeable ending. We cannot go back to the pre-pandemic “normal”. The old ways cannot work anymore. But it is evident that the Government must bring policy reforms to tackle these challeges brought by the virus on our economy.
For Creating your Comprehensive Financial Plan,
Please Subscribe to our