The article highlights the factors that explain that India’s economic recovery is broad-based and sustainable in nature.

Revising India’s GDP forecast

• With major banks, investor advisory groups, and credit rating agencies revising their GDP forecasts for the next financial year while lowering estimates of economic contraction for this fiscal, surely the bounce back is well on track.
• Some of the earlier assessments were too pessimistic and assumed a gradual pace of economic normalisation.
• Thus, a reassessment was given but nevertheless welcome.

Many continue to challenge conventional belief regarding India’s economic recovery being broad-based and sustainable in nature. It is important that we look at underlying data and relate it with steps undertaken by the government with the sole objective of reviving India’s economy.

1) Employment figures

•  Economic activity will see a faster revival than employment figures as labour markets tend to lag.
• This is because most firms face costs associated with hiring and firing and they prefer to adjust the working hours before adjusting employment numbers.
• Trends labour market does indicate prospects of a cyclical recovery which will lead to jobs being added at a faster pace than what was originally estimated.
• Critically, the new scheme subsiding part of the EPFO contribution for the unskilled workers will benefit enormously which will then have spill-over effects.

2) Normalisation driven by rural economy

• The bulk of the normalisation of economic activity was driven by the rural economy which eventually benefited the rest of the economy.
• Rural growth has gained momentum and definitely augurs well for the Indian economy as it gets one of the engines firing.
• The strong push by the government towards financing construction of assets has a significant impact.

3) Avoiding excessive and inefficient use of public funds

• The design of the aid by the government is similar in terms of its size to programmes announced by other emerging markets.
• However, the choice of instruments is along the lines those deployed by developed countries.
• The government has refrained from excessive and inefficient use of public funds by restricting expenditures to temporary fiscal commitments.
• This is important as our 2008 response had a lot of permanent fiscal expenditures which led to a systematic deterioration of our macroeconomic fundamentals.
• The government has taken undertaken a sizable fiscal expansion combining automatic stabilizers, cash transfers, bank guarantees, expansion of expenditure under various programs such as MGNREGA, Food Security Act and Urban Affordable Housing Measures.
• The fiscal component under each of these policies can be easily reversed making it possible for India to revert to its fiscal consolidation path a lot sooner.

4) Structural reforms as a part of its economic response package

• These reforms are geared at unshackling the productivity potential in areas such as APMCs,  labour markets, other reforms that allow for greater private role within the economy in critical areas such as coal, space technology etc.
• These moves and their productivity gains will help India improve its potential growth rate.
• This means that India should be better equipped at sustaining a high-growth rate of above 7 per cent due to the productivity gains that will be an outcome of the proposed reforms.
• This will further help a faster reduction in fiscal deficit as a percentage of GDP and our public debt to GDP figures.

Conclusion

Strong macroeconomic fundamentals are necessary for sustained economic growth and the government has focused on a response package which prioritises sustainability of growth rather than having a fast yet unsustainable economic recovery from the crisis.

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