Navigating our economy in a post-pandemic world

The IMF now says that the size of the Indian economy will be $4.08 trillion in 2024. Compare this with the estimates given in the World Economic Outlook published in October 2019, before the outbreak of the pandemic. The multilateral lender then said it expected the size of the Indian economy to be $4.63 trillion in 2024. This means that the value of economic activity in India will be much less than what its pre-pandemic trajectory suggests. The difference is over $500 billion.

This is the story of earlier years as well. Permanent loss of production and thus loss of economic opportunity for common Indians is a big blow. This grim fact should be kept in mind, even as we celebrate a smart economic recovery from the depths of the recent recession. The IMF in its April 2021 report on the world economy said that developed economies are more likely to return to their earlier economic trajectory, while emerging economies will be more difficult. That message is reiterated in the October 2021 edition of the report. There is likely to be some divergence within emerging markets as well. Some countries like China, Vietnam and Bangladesh are expected to return to the earlier trend than their peers. The latest estimates suggest that the Vietnamese economy will be larger by about $118 billion in October 2021 compared to an estimated $118 billion—$512.99 billion versus $394.88 billion.

What can turn the tide? The more pessimistic view is that India is headed for a lost decade, characterized by slow growth and rising inflation. The more optimistic view is that displacement will provide the necessary backdrop for a wave of innovation over the next few years, just as the decades following the devastating world wars saw extreme economic booms in many parts of the world. In June 2020, this column cited an article by macroeconomist Barry Eichengrin in which he identified three concerns as well as a silver lining for the post-pandemic world. The three concerns were the suspension of education, weak public investment and supply-chain disruptions. The silver lining was a possibility that disruption of existing ways of doing things would “open up space for new entrants, through a process referred to by early 20th-century Austrian economist and social theorist Joseph Schumpeter as constructive destruction”.

The IMF has pointed to four building blocks for thinking about a post-pandemic economy. This is an interesting list. First, governments must compensate for the loss of human capital from the health shock as well as the closure of educational institutions. Second, public policy must facilitate new opportunities for economic growth, particularly through green technology and digital networks. Third, after uneven economic recovery, countries will have to hit the problem of rising income inequality. And fourth, public finance will eventually have to be put back on a sustainable path.

Each country has to forge its own path out of the pandemic. However, these four broad themes are relevant to most economies, and are a good way to frame some ongoing policy problems. India is no exception. Steps to reopen schools, invest in public health, and help migrants return to cities are all welcome in these circumstances. High inequality can stifle lasting improvement in domestic private sector demand; The boom in exports has so far taken the pressure off the Indian economy on the demand side. The sharp increase in tax collections has now created fiscal space for more spending by the government, but the burden of high public debt is likely to persist for this decade.

Two of the most attractive of the four themes is using policy to accelerate structural changes that could give productivity the next boost. The transition to a green economy entails a rethinking of energy, transportation, agriculture and the design of cities. The rapid digitization of life has been supported by the proliferation of telecommunications networks by the private sector and the creation of new digital public goods by the public sector. The risk here comes from a lack of access to digital networks for the poor and a growing tendency to monopolize power and privacy protection. A well-managed dual transition to green as well as digital economy will provide opportunities for both new investment by entrepreneurs and new space for creative thinking by policy makers.

Niranjan Rajadhyaksha is a member of the Academic Board of Meghnad Desai Academy of Economics