India needs to continue to implement critical reforms in key areas such as health, labor, land, skills and finance to come out stronger from the impact of the COVID-19 pandemic. These reforms should aim at enhancing productivity of the Indian economy and spur private investments and exports, says a new World Bank report.
The India Development Update, released today, is a biannual flagship publication of the World Bank that takes stock of the Indian economy. The current issue describes the state of the Indian economy over the previous six months and places these in a longer-term and global context. It also provides a more in-depth analysis of selected economic and policy issues and highlights the economic reforms that India has been undertaking and needs to continue with in the medium to long-term.
Outlook for the Indian economy
The World Bank projections in this report are from May 2020 when it projected the economy to contract by 3.2 percent in FY20/21, and rebound slowly in FY21/22. It further estimated that the COVID-19 outbreak is likely to have significant fiscal implications. The fiscal deficit of the central government is likely to increase to 6.6 percent of GDP in FY20/21 and is expected to remain elevated at 5.5 percent in the following year. Assuming that the states’ deficit is contained within 3.5-4.5 percent of GDP, the combined deficit could rise to around 11 percent in FY20/21. While there is a significant level of uncertainty around the projections, the general government debt-to-GDP ratio is projected to peak at around 89 percent in FY22/23 before gradually declining thereafter.
The outlook comes predicated with several downside risks. Further challenges have emerged in recent weeks which are likely to weigh on the prospects in the near term. These risks include the virus continuing to spread; a further deterioration in the global outlook; and additional strains projected on the financial sector. Keeping these factors in mind, a steeper contraction may be projected in the revised outlook that will be available in October 2020.
“While the Government of India, with the support of the Reserve Bank, is continuing to take action to limit the impact of the COVID-19 pandemic, there is a recognition of both the uncertainty of the nature of the economic revival globally and the emergence of opportunities opened by the current crisis,” said Junaid Ahmad, World Bank Country Director in India. “Countries that invest in sectoral reforms – infrastructure, labor and land, human capital — and ensure that their national systems are connected to the Global Value Chains, are more able to respond to uncertainties and are better placed to take advantage of any global shifts. Investing in these areas will give India the ability to navigate these uncertainties and be more competitive as the world emerges from the pandemic.”
Priority areas of reforms
COVID-19 has come at a time when the Indian economy had already been decelerating for nearly two years. The pandemic has exacerbated some of those challenges. Besides the immediate relief and recovery measures, the government has announced significant reform measures for agriculture, education, public sector, and micro, small and medium enterprises. The report says furthering such reforms will help put the economy back on a 7 percent growth path.
i) Strengthening fiscal reforms
In order to instill fiscal discipline in handling COVID-19 related implications, the report suggests India may:
· Reassess subsidies to leverage any scope for efficiency gains;
· Evaluate how much can be borrowed domestically and externally;
· Generate nontax revenues more aggressively; and
· Link the repayment of new borrowings to disinvestment receipts.
ii) Financial sector reforms
To put the financial sector on a sounder footing, the report identifies specific areas of reform. These include:
Financial sector stability. The RBI’s continued focus on risk-based regulation and supervision will be important as the temporary forbearance measures are phased out. Further strengthening of financial sector safety nets; close monitoring of liquidity and capital buffers; and regulatory and institutional framework for debt restructuring and insolvency could help deal with any spike in non-performing loans.
Reforms in the Non-Banking Finance Company (NBFC) sector. Reforms in the NBFC sector are needed to support its role in channeling credit to the real sector. In order to diversify the funding base and to strengthen the NBFC sector, recently launched liquidity schemes for NBFCs could be institutionalized. It would also be important to continue strengthening risk-based regulation and oversight of NBFCs.
Deeper capital market reforms. Deeper capital markets are critical for increasing the availability of long-term finance. The report calls for the government to continue its focus on easing demand and supply side constraints, and to build on recent initiatives. The report also suggests revisiting investment guidelines for institutional investors to crowd in long-term finance and address asset liability mismatch issues.
Role of fintech. The fintech sector has the potential to close the gap in access to financial services and help firms, especially MSMEs, access much needed credit and liquidity. The report suggests mainstreaming fintech to reach firms faster and at a lower cost.
Moving to a more strategic public-sector footprint. Recent efforts including consolidation of public sector banks and strengthening of corporate governance are encouraging steps towards a more strategic public sector footprint. Moving forward, gradually scaling back the statutory requirement for state banks to provide liquidity, as well as the priority-sector lending policy, will help reduce market distortions.
“The recent liquidity and performance issues in the financial sector, exacerbated by the COVID-19 crisis, present policymakers with a strong reason — and an opportunity — to accelerate efforts towards building a more efficient, stable, and market-oriented financial system,” said Poonam Gupta, Lead Economist, World Bank and Dhruv Sharma, Senior Economist, World Bank and co-authors of the report. “It is encouraging that the government is moving to a more selective and strategic public sector footprint in the financial sector. International experience shows this can boost the banking sector’s ability to support credit, facilitate effective financial intermediation, and reduce fiscal exposure.”
The current crisis has also brought to the forefront new economic opportunities in the areas of digital technology, retail, health-technology and education-technology services; and global demand in areas such as pharmaceuticals, medical equipment, and protective gear. These opportunities can provide new growth levers for India, the report adds.
Lao Economy Set to Recover if Threats Can Be Contained
While economic growth in the Lao PDR contracted in 2020 for the first time in over two decades, the economy is set to recover in 2021 and in the medium term, provided the impact of the COVID-19 pandemic is contained and business can resume with trading partners, according to a World Bank report released today.
The latest Lao PDR Economic Monitor — Supporting Economic Recovery — finds that the COVID-19 pandemic has had significant adverse effects on growth across the country, plunging the economy into its first recession since the Asian financial crisis of the late 1990s. The report estimates that the economy will shrink by 0.6 percent in 2020, with tourism services, wholesale and retail trade, and manufacturing most seriously affected.
Declining economic activity has reduced the government’s ability to collect revenues, which in turn has led to a worsening fiscal situation. The kip has lost value against foreign currencies and this depreciation, along with rising food prices, has caused higher headline inflation.
“While the Lao PDR has so far done very well to contain the spread of COVID-19, the economic effects of the outbreak have affected the livelihoods of millions of Lao people, and pose a serious risk to sustained poverty reduction”, said Nicola Pontara, World Bank Country Manager. “However, if the pandemic remains under control domestically and business can resume with trading partners, we can expect some recovery in 2021”.
According to the report, GDP growth is expected to rebound to 4.9 percent in 2021. Medium-term growth would also gradually recover as a result of infrastructure investment and a further pick up in services, exports, and private consumption. More COVID-19 outbreaks, however, would pose challenges for the recovery, due to the knock-on effects of potential lockdowns or restrictions on trade and tourism.
The report also highlights the rising public external debt burden. External debt and low foreign currency reserves limit the government’s capacity to adopt a robust fiscal stimulus. Moving forward, priorities include putting public external debt on a sustainable trajectory, improving the generation of revenue to create fiscal space, and supporting those households and firms most severely affected by the economic downturn.
A thematic section, Livelihoods in the Time of COVID-19, identifies the groups most vulnerable to the pandemic, and recommends policy options that could help protect their livelihoods. These include expanding coverage of cash and in-kind food transfers, and promoting skill development for laid-off workers and returned migrants.
Turkey: A full recovery from the COVID-19 crisis will take time
The COVID-19 crisis has hit Turkey’s people and economy hard, accentuating pre-existing challenges such as the low share of workers in formal employment and obstacles to firm expansion. Well-designed support to households and firms that is aligned with a return to macroeconomic stability, and reforms to improve competition and labour laws, institutions and business would help to build a lasting recovery, according to a new OECD report.
The latest OECD Economic Survey of Turkey says a full recovery from the COVID-19 crisis will take time, given the blow from the drop in tourism and uncertainty over the future evolution of the pandemic, as well as Turkey’s limited welfare provisions and high levels of corporate and household debt. The crisis has put pressure on the viability of many businesses and on social cohesion, hitting informal workers, women, refugees and youths particularly hard. While a one-size-fits-all support strategy was justified during the first phase of confinements, policy support in the second wave of the pandemic should now be adapted to the varying conditions of sectors, workers, households and companies.
The pandemic has also amplified monetary policy challenges, with inflation surging further to well above Turkey’s 5% official target following interventions to shore up economic activity, bank liquidity and the Lira currency. Support to people and firms should be provided in a transparent and stable way to build investor confidence and reduce the risk of abrupt movements of capital. For example, targeted allowances for a stated period can be more effective than concessional loans and one-off transfers. Turkey should also seek to replenish foreign reserves and restore the independence of the Central Bank, the Survey says.
In parallel to the pandemic, Turkey remains exposed to geopolitical and trade risks, including the effect of the United Kingdom’s exit from the EU. As things stand, and factoring in headwinds from the second wave of the pandemic, the Survey projects Turkey’s GDP rebounding by 2.6% in 2021 and 3.5% in 2020.
“Turkey is looking at a gradual recovery from the COVID-19 crisis and risks persist for growth and well-being,” said Alvaro Pereira, OECD Director of Economic Country Studies. “The focus should be on restoring macroeconomic stability and seeing the post-crisis period as an opportunity to encourage foreign and domestic investment through stronger public governance, and to use market and labour reforms to empower businesses to grow and create quality jobs.”
Once a recovery is under way and investor confidence restored, the Survey estimates that a combination of market, institutional and education reforms could lift GDP per capita by 1% per year over the coming years. Market liberalisation reforms should include removing anticompetitive regulatory barriers in product markets, increasing labour market flexibility and reducing corporate income tax, while institutional reforms should improve public governance and the formalisation of business activities.
While the dynamism of Turkey’s business sector, and the country’s strong entrepreneurial spirit and youthful workforce, have been an asset through the COVID-19 pandemic, the majority of Turkish firms are very small and have limited capacity to weather a protracted slowdown. Significant parts of the business sector rely on informal or semi-formal practices in employment, corporate governance, financial transparency and tax compliance. Easing overly stringent regulations on product and labour markets and simplifying business and tax systems would make it easier for young firms to grow and move to the formal sector. A modernized and more efficient business sector would also help firms to emerge stronger from the crisis.
In terms of labour reforms, cutting non-wage labour costs, shifting part of the cost of social protection to sources other than payroll contributions, making statutory minimum wages affordable for low-productivity firms, and modernising regulations for temporary as well as permanent contracts would stimulate the creation of formal jobs once the recovery takes hold.
Education reforms should seek to enhance adult skills in a country which ranks among the highest in the OECD for qualification mismatch, with 43% of the working population either over-qualified (29%) or underqualified (14%) for their job. Investing more in Research & Development and in digital technology and infrastructure would also raise growth prospects.
Call for Closer Policy Collaboration on Artificial Intelligence
A recent APEC Business Advisory Council (ABAC) report revealed that artificial intelligence (AI) has a role to play in mitigating both the short and long-term effects of the COVID-19 pandemic on APEC economies.
From automated health diagnostics in hospitals to smart recruitment processes in organizations, the report, titled Artificial Intelligence in APEC, finds that this technology is creating new, previously unforeseen jobs, products and services that will contribute to the post-COVID-19 economic recovery.
“As we release this report, APEC economies are facing the twin threats of a global pandemic and an economic crisis that will leave its mark on our communities for years to come,” said Dato’ Rohana Tan Sri Mahmood, Chair of the 2020 APEC Business Advisory Council.
“How APEC economies address the accelerated rise of the digital economy and leverage new technologies like AI is one of the most pressing issues of our time,” she added.
The report also examines how AI is being adopted and applied across the region and makes key recommendations calling for closer policy collaboration between business and governments.
Of the surveyed APEC economies, the report found that most already have plans, policies or programs devoted to driving or supporting AI ecosystems. In fact, the report highlights some of the AI-related innovation already underway across the region, including finding ways to help patients suffering from locked-in syndrome to communicate with the world by a team of engineers at a university in the Philippines.
Another notable innovation will benefit the farming industry. A Japanese corporation is trying to improve the efficiency of farming by automatically aggregating and analyzing sensor data and satellite images to provide farmers with farm management recommendations. In addition, a group from New Zealand developed AI-powered crocodile-spotting drones to keep swimmers safe in Australian rivers, among others.
“AI technologies have the potential to significantly impact businesses and communities across our economies,” Dato’ Rohana explained. “We believe that APEC can serve as an effective forum for member economies to collaborate on ways to maximize the benefits of AI and promote inclusive growth while ensuring its use in a responsible and ethical manner,” she added.
According to the report, recognizing this technology and all its capabilities is a central component of an economy’s forward-looking policy for growth, productivity and job creation, highlighting that the potential of AI extends beyond economic benefits and includes tools to address complex issues such as poverty, inequality, climate change, healthcare and ways to cope with effects of the pandemic.
As AI becomes more widely accepted, adopted and used for innovation, the report suggests that APEC policymakers will need to draft new policies, revise existing ones, confront new questions, address new needs and reassess its impact.
“With the cooperation of the public and private sector, a coordinated future of AI will increase the Asia-Pacific region’s competitiveness and further facilitate regional integration,” the report notes.
Artificial intelligence, already well on its way to transforming the Asia-Pacific, drives social and economic growth across all key sectors. However, the pandemic, and the ensuing focus on economic recovery, brings a renewed sense of urgency to discussions around AI usage.
The projection of Turkish power in the Eastern Mediterranean
The recent military conflict between Greece and Turkey over potential gas fields located in disputed waters is linked to a...
Pandemic curbs trend towards ever-increasing migration
Travel restrictions and other curbs to movement put in place in the light of the COVID-19 pandemic, have put a...
Democracy Or What? – And Then Climate
Most of us were appalled to see what happened in Washington a ten days ago when a ‘mob’, incited by...
CAR: Displacement reaches 120,000 amid worsening election violence
“Worsening” election violence in the Central African Republic (CAR) has forced 120,000 people from their homes, the UN refugee agency,...
Covid third world debt will outlast the virus – it should be relieved
In a year – or two or three – we will have mostly forgotten the pandemic. But the unprecedented third...
Recovery action plan of the Union: On Next Generation EU & a New Independent authority?
The first address of the European Commission since the pandemic was one highly anticipated by all the citizens of the...
Lao Economy Set to Recover if Threats Can Be Contained
While economic growth in the Lao PDR contracted in 2020 for the first time in over two decades, the economy...
Americas3 days ago
Flames of Globalization in the Temple of Democracy
South Asia3 days ago
More about how democracy should be elected -Interview with Tannisha Avarrsekar
Religion2 days ago
Daughters Gone Forever: Forced Religious Conversions
Intelligence2 days ago
Hybrid Warfare: Threats to Pakistani Security
Russia3 days ago
How Crimea Strengthened Russia’s Eurasian Identity
Economy3 days ago
Public Council Sets New Tasks to Support Russia-Africa Relations
Economy2 days ago
Flourishing Forex Market amidst Covid pandemic
Middle East2 days ago
Prohibition of importing reliable vaccines to Iran