Economists at the International Monetary Fund (IMF) provide estimates of the future trajectory of the global economy twice a year. The latest set of forecasts are out in the October 2021 edition of the World Economic Outlook. The numbers on India give us a good idea of the lasting economic damage done by the pandemic. The precision of economic forecasts is suspect even at the best of times; and more so when there is immense uncertainty. However, these economic forecasts do usually give us a good sense of the general economic trajectory.
The IMF now says that the size of the Indian economy will be $4.08 trillion in 2024. Compare this with the estimate provided in the World Economic Outlook published in October 2019, before the pandemic struck. The multilateral lender then said that it expects 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 far lower than what its pre-pandemic trajectory would have suggested. The difference is more than $500 billion.
It is a similar story for earlier years as well. The permanent output losses—and thus loss of economic opportunity for ordinary Indians—is a big setback. This sobering fact should be kept in mind even as we celebrate the smart economic recovery from the depths of recent downturns. The IMF had said in its April 2021 report on the world economy that developed economies are more likely to get back to their earlier economic trajectories, while emerging economies would find the going more difficult. That message has been reiterated in the October 2021 edition of the report. There is likely to be some divergence within emerging markets as well. Some countries such as China, Vietnam and Bangladesh are expected to return to their earlier trend earlier than their peers. The latest estimates suggest that the Vietnamese economy will be larger by around $118 billion compared to what was expected in October 2021—$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 with slow growth combined with rising inflation. The more optimistic view is that dislocations over the next few years will provide the necessary backdrop for a wave of innovation, just as the decades that followed the destructive world wars saw immense economic buoyancy in many parts of the world. In June 2020, this column had cited an article by macroeconomist Barry Eichengreen in which he had identified three worries as well as one silver lining for the post-pandemic world. The three worries were the suspension of education, weak public investment and supply-chain disruptions. The silver lining was a possibility that the disruption of existing ways of doing things “will open up space for innovative new entrants, through the process that the early 20th century Austrian economist and social theorist Joseph Schumpeter referred to as creative destruction.”
The IMF has pointed to four building blocks to think about the post-pandemic economy. It is an interesting list. First, governments will have to reverse the damage done to human capital because of the health shock as well as the closure of education institutions. Second, public policy will have to facilitate new opportunities for economic growth, especially through green technology and digital networks. Third, countries will have to attack the problem of rising income inequality after the uneven economic recovery. And fourth, public finances will eventually have to be brought back to a sustainable path.
Each country will have to design 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 of the ongoing policy conundrums. India is no exception. All moves to reopen schools, invest in public health and help migrants come back to cities are welcome in these circumstances. Higher inequality could strangle a sustainable recovery in domestic private-sector demand; the export boom has till now taken pressure off the Indian economy on the demand side. A sharp rise in tax collections has created fiscal space for more spending by the government right now, but the burden of high public debt is likely to persist through this decade.
The most attractive of the four themes is using policy to hasten two structural shifts that can provide the next boost to productivity. The transition to a green economy entails rethinking energy, transport, agriculture and the design of cities. The rapid digitalization of life has been supported by the spread of telecom networks by the private sector and the creation of new digital public goods by the public sector. The risks here come from lack of access to digital networks for the poor, and a growing tendency towards monopoly power and privacy protection. A well-managed dual transition to a green as well as digital economy will provide both an opportunity for new investments by entrepreneurs and new space for creative thinking by policymakers.
This article was originally published in Livemint on 20 October 2021.
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The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.