The Indian economy’s road to recovery is more painful than you think

While government estimates paint a rosy picture, the pre-pandemic economic data clearly shows that the Indian economy’ s path to better health will be long and painful.


In the summer of 1991, the Indian economy broke the shackles of an inward-looking Soviet-style one and ushered liberalisation. This in turn helped pull about 300 million Indians out of poverty fuelling one of the biggest wealth creations in history. 

"No power on earth can stop an idea whose time has come… Let the whole world hear it loud and clear. India is now wide awake," said Manmohan Singh, the then Finance Minister of India who was entrusted with the responsibility of carrying out structural reforms to liberalise the country. 

Now, 30 years later, the country is looking for a similar resurrection. The multiple waves of coronavirus has already battered the economy and even as the cases recede, the effects are expected to linger much longer. The symptoms of the country’s economy are similar to that of COVID-19 — they are sluggish, have undergone depression and are looking at a delayed recovery. 

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Close to four million Indians had died due to COVID-19 by the end of June 2021, according to The Economist’s estimate of the real toll. These figures show that the virus has been much deadlier in India than other countries such as the United States and Britain, whose mortality rate looked similar to India’s until the second wave hit. So it isn’t surprising that India is still struggling to get back on track.


Sluggish growth

India’s GDP contracted 7.3 percent in 2020-21, more than any other big Asian economy. This was just before the massive second wave of the coronavirus. 


“The second wave of the pandemic has proven to be pretty costly for economic activity. Many households have been affected and are attempting to repair their balance sheets as well as withhold spending. This means that economic activity is  expected to remain below par even once recovery gets underway,” said S&P Economist for Asia Pacific, Vishrut Rana, at the ‘India Credit Spotlight 2021’.


The pandemic has pushed the country’s economy off the cliff. Even as developed countries are seeing a rebound, India is stuck with surging inflation, weak demand, persistent unemployment and falling savings. It has been struggling with many of these issues even in the past decade, but has presently been worsened by the health crisis. 


Long road to recovery

Those who follow the Indian economy avidly would know that the GDP numbers for the first quarter of the fiscal year 2021-22 would not be an easy read, as they are based on the 24.4 percent contraction in the first quarter a year ago. 


Representatives of the government have been quick to jump into the “V-shaped recovery” monologue, but when the current set of data is juxtaposed with numbers from the pre-COVID period, the picture does not match with the rosy outlook being painted. This means the country’s economy still has a long way to go before going back to the size it had attained in 2019 and returning to the accelerated growth path.


A study by the National Council of Applied Economic Research (NCAER) suggests that without a fast-growth strategy, Asia’s sixth largest economy may never make up for the lost growth. India may also not be able to reap the demographic dividend of a relatively large workforce with such few dependents, according to the study.


Policy support

The central bank has already set its interest rates at record lows and is committed to support government borrowing to fund the budget deficit. 


Without apt government support, India’s economic growth may not return to pre-pandemic trajectory for several years to come. The government tried to match its macro-policy response to the crisis with its Asian peers, but the stimulus – more than 10 percent of GDP, was more hype than reality. 


The real spending has been paltry and concentrated on structural reforms of critical sectors including aviation, mining, coal, atomic energy, power distribution and space. Though these measures might have the potential to turnaround the economy in the long term, they are likely to be ineffective in the short term.  


Rollout picks up speed, but vaccination rates low

The nation’s vaccine rollout has shifted to a faster gear in the last couple of weeks, but the vaccination rate is still low. At the current pace of inoculation, it would still take another six months to fully vaccinate even 80 percent of the population, according to a research note sent by Capital Economics to their clients.


The risk of new virus outbreaks and the reintroduction of containment measures is still looming in the meantime.


Today, considering all the wounds and bruises, it looks like the Indian economy’s path to better health will be longer and more painful than it is for other countries. 


Edited by Roshni Shroff


Some resources to help you learn more about the state of Indian economy after COVID-19: 

Explained: Is India's economy gaining immunity after COVID-19? 

Delayed recovery greatest risk to pandemic-hit Indian economy