Sustained Covid-19 Spread Poses Risk To India’s Short- And Medium-Term Growth

The sustained spread of Covid-19 poses downside risks to India's short- and medium-term growth despite various structural reforms implemented by the government to combat the crisis.

These reforms, including agriculture, labour and redefining small businesses, among others, however, will strengthen the fundamentals of the economy towards a strong and sustainable long-term growth, the Ministry of Finance said in its monthly economic report. Stakeholders using the opportunity created by the government's policy announcements will also improve India's potential to grow, it said.

India's economy was slowing even before the pandemic struck. The world's biggest lockdown, effective March 25, to contain the virus—that has so far killed over 1 lakh and infected more than 65 lakh Indians—froze economic activities and capped consumption, pushing the nation toward its first full-year contraction in more than 40 years. That prompted the government to announce the ‘Atmanirbhar Bharat Abhiyan', a post-pandemic financial rescue package, to restore economic growth. India's real GDP contracted 23.9% in the April-June quarter.

Consumption, according to the report, may get a boost if retail inflation eases. This, it said, will happen as intermittent lockdowns imposed to control spreading of the virus cease, and containment zones become fewer, enabling smooth supply chain operations.

Price pressures have occurred from persistent supply chain disruptions more than offsetting weak demand. Headline inflation is expected to remain elevated in the first half of 2020-21 but likely to ease in the second half of the fiscal, the report said citing the latest Monetary Policy Committee's statement. A more favorable food inflation outlook may emerge in the coming months with bumper rabi harvest and improving management of food surplus that may ease prices of cereals, it said.

As India lifts lockdown restrictions, economic indicators suggest a steady recovery in almost all sectors, the report said. The growth outlook has improved ‘significantly' with increasing goods and services tax collections, revival of auto sales, and highway traffic movement, among others, it said.