The COVID-19 pandemic continues to adversely impact lives, livelihoods, and the economy in India, with a devastating second wave wreaking havoc even as the threat of a third wave looms large. Rising uncertainty has reduced consumer and business confidence. This follows an economic slowdown during the three years preceding the pandemic. With investments and trade performance weak, the Indian economy was firing mainly on consumption, which the first and second waves of the pandemic have hit badly.
Renewed restrictions to curb the current coronavirus wave have stalled economic activity, leaving many millions out of work and pushing economists – who have broadly been bullish – to downgrade their views for the second time since early April
India’s unemployment rate soared to a near one-year-high of 14.73% in the week ending May 23, according to the Center for Monitoring Indian Economy (CMIE), reflecting the impact of the economic slowdown.
The Reserve Bank of India has kept its monetary policy loose, including several liquidity measures, and was expected to stay on an easy course for this fiscal year.
While calls have increased for more fiscal stimulus to speed up the economic healing, the government has limited space to respond to challenges posed by the health crisis.
“If the Indian government increases spending … it will probably prevent a loss in economic output in the short term, but this simultaneously puts more pressure on the sustainability of debt in the longer term, essentially mortgaging their future,” said Rabobank’s Eijkelenburg.
“India’s policymakers find themselves between a rock and a hard place when it comes to decisions on additional fiscal stimulus.”
Experts expressed apprehensions about the emergence of new and more virulent strains of the novel coronavirus, which might necessitate the re-imposition of lockdowns across the country, leading to a further (and possibly dramatic) reduction in growth estimates and adding to dampening demand. Complicating matters further is the fact that, as one economist noted, it is not known how consumers and households will react following the end of the second wave: How would household savings be impacted? Will consumers be reticent about spending again?
India’s already stressed banking sector, which is saddled with legacy non-performing assets, remains of concern. Experts fear a fresh wave of bankruptcies that add stress to the books of commercial banks, and that loan repayment schedules could be further delayed. India’s non-banking financial sector – which has traditionally lent to small and medium enterprises likely to be most affected by first and second wave lockdowns – could also contribute to the stress on the banks that lend to them. Similar fears hold about how pressure on microfinance institutions could systemically affect the banking sector.
Eduindex News 