The pandemic has added woes to an already slowing economy as is evident from the extent of contraction in Q1 F2021. However, the current business situation is constantly evolving. The latest and high-frequency data suggests that the economy is gradually recovering after the unlock. Supply-side activities are resuming , with every phase of the economic unlock being designed to limit economic disruptions. The initial pent-up demand has also aided in the economic rebound as seen in the months following the unlock. Many factors would have to be considered to determine if this rapid rebound is sustainable going forward.
Social distancing norms, the rising number of infection, and partial regional lockdowns continue to keep domestic demand low and economic activity below the pre-pandemic level. Financial and employment uncertainties have led Indian consumers to save more and spend less on discretionary goods, stated Deloitte’s consumer behaviour survey. Lower demand is also limiting business investment in capital projects and delaying hiring decisions. In other words, low confidence amongst consumers and businesses, as is reported by the RBI, will likely limit the speed of economic rebound.
With COVID-19 here to stay, we are yet to see how the economy will emerge out of this crisis and grow stronger amidst disruptions and uncertainties. Government and businesses are addressing this crisis with resilience. We need to continue to understand the emerging norms and tap into opportunities presented by them to recover and thrive in the future, despite uncertainties.
Every crisis is an opportunity to think and innovate. Policymakers can use this opportunity to increase capital spending and enhance productivity. They can also look at building and monetising assets to generate revenue. One way to increase capital spending is boosting India’s physical and social infrastructure to compete with global peers, and spending on healthcare. This step will generate employment for low-skilled employees, improve private-sector performance, and increase activity amongst small and medium-sized enterprises. As a result, the demand in the economy will go up.
Fortunately, the Indian government announced one of the largest and ambitious infrastructure projects earlier this year and is already undertaking many projects as planned earlier in order to boost the economy. The government needs to continue implementing reforms to strengthen the institutional structure, step up efficiency, and increase transparency. To attract investors looking to optimise cost and diversify their supply chains, the government will have to address labour challenges and structural logjams (related to environmental and other regulatory clearances), simplify tax processes, resolve issues related to land acquisition, etc.
Investment in emerging opportunities (such as collaboration, consolidation, and digitisation), and improving the skill base can help organisations improve productivity and capture new markets. Organisations can also use this opportunity to revisit their sourcing plans and restructure supply chains for many industries to minimise risks. There is evidence that businesses are proactively engaging in investment opportunities and institutional investments have bounced back.
In some industries and segments, including pharma and auto, global in-house centres (GICs) may engage in research and innovations to move up the maturity curve and tap into growth opportunities. GICs in India has proven its potential and created lasting value. The country needs to further enhance its attractiveness in services exports by helping multinationals in cost rationalisation and diversification.
As the government is taking measures to build a self-reliant India, the market and investors have to build on their resilience to emerge stronger on the other side of the pandemic and thrive in the future. Building a stronger infrastructure and social capital, such as the health of people and industries, will drive resilience. India has always stood strong in the face of a crisis. It has addressed several challenging situations prudently in the past. Difficult reforms and prudent policy measures and business strategies can put the economy back on track quickly.
Rumki Majumdar is an Economist at Deloitte India. Views expressed are the author’s personal.