Macroeconomic winds are blowing favorably as we move into the new year. The stock markets are at an all time high. Stock indexes are up nearly 60 percent from their March lows. The stock market is supposed to be a harbinger of economic times to come, so it is a clear sign of a strong recovery. The liquidity of the banking system is more than sufficient. Interest rates are at their lowest for several decades. The spread between Indian and Western key rates has long been the lowest. Coupled with inflation rates above 6 percent.

This means that for borrowers, real interest rates are close to zero or negative. This should be good news for the government, which is the biggest borrower in the system, or those planning to take out a home loan, or companies planning to take out loans for their expansion. The quarter ending in September showed dramatic growth in corporate profits across many sectors.

Business confidence

The main indicator, called the purchasing managers index, has been showing an upward expansion for four consecutive months. If all of this business confidence manifests itself in a sharp increase in hiring and hiring and visible job creation, it will also boost consumer confidence. Business and consumer confidence builds on each other. Thus, a positive virtuous circle would be very welcome.

The Minister of Finance is promising a budget like never before, which hopefully signals a big boost to spending.

The infrastructure spending will benefit related sectors like construction and of course employment.

And yet, it’s worth highlighting the dark side. First, despite a strong V-shaped recovery next year, the point is, this year has been a recession. We’re going to have a reduction in GDP and national income of about 8% to 10%. a strong recovery next year, from 10 to 12 percent for example, would still mean that for more than two years net income growth is barely above zero.

Inflation alert

Second, due to measures such as the severe lockdown and the earlier four-year slowdown, the economy’s potential growth rate may have moved closer to 5%. So, any growth greater than this will definitely lead to overheating. Therefore, we will have to watch out for inflation, which can hurt household budgets, as well as the business climate.

For example, over the past 12 months, the inflation rate based on the Consumer Price Index has been above 6 percent (except for being slightly lower in March). It is above the tolerable band of the Reserve Bank of India. Sooner or later the RBI, which has been extremely accommodating in its monetary policy, will have to start tightening the money supply. This will negatively affect growth.

Third, there has been a great deal of abstention from tolerance for indiscipline in credit. So, after an extended moratorium and a restructuring of stressed loans, it is possible that balance sheet day is not too far away for India’s banking sector. Be prepared for an unpleasant spike in the bad debt ratio, which will require a large injection of capital from the government.

Quiet but deadly

Fourth and most importantly, there is the silent and deadly impact on education and health.

The 2020 Human Development Report released this week shows India ranks 131st out of 189 countries, having slipped two places in the past two years. Sri Lanka is 72 and China is 85. Even more worrying, only a fifth of India’s workforce can be described as “skilled”. This low percentage puts India in the same league as Sudan, Cameroon and Liberia. All of its South Asian neighbors have a higher percentage.

India also has 42% of its population in the vulnerable category, just above the minimum poverty line of $ 1.9 per day. The pandemic, loss of livelihood or illness in the family can easily drop them below the poverty line. The pandemic and lockdowns have severely affected the informal sector and small and microenterprises. The worst impact has been on the children.

The latest National Family Health Survey (NFHS 2019-2020) shows high levels of stunting and wasting in children. These indicate lower height and weight for the child’s age, respectively. They reflect chronic undernutrition and malnutrition. The most worrying aspect is that stunting or underweight has increased in 14 of India’s 17 states. This happened even as access to sanitation and drinking water improved.

Children most affected

Obviously, this is the result of a downturn in the economy and the loss of livelihoods. For example, during the lockdown, since schools were closed, so were midday meals. For many children, from poor or near-poor households, it was the only meal they ate throughout the day. There have also been cuts in spending on child nutrition programs due to fiscal constraints.

The Covid-19 pandemic has affected the education of 290 million people across the country. The State of Education Annual Report (ASER) indicates that nearly 5.3% of children aged 6 to 10 have been withdrawn from school. Many children have been forced to provide for their families. Likewise, even among school children, almost 38.2% did not have access to smartphones. Online learning therefore bypassed a large portion of students, in part because they either had no access or could not afford digital access. Digital inequalities have worsened and are more visible in education.

Likewise, in healthcare as well, the high priority given to treatment with Covid means that patients with HIV, cancer and kidney disease who need regular access to hospitals have been denied treatment. or have faced immense difficulties.

So, on the one hand, the economy is on a solid recovery path, but on the other hand, the human capital base of the economy needs substantial reconstruction and investment. In both children’s education and health care in general, governments at all levels need to increase their financial and resource commitment. Public expenditure on health should be increased to 3 percent and education to 5 percent of GDP. Even if this means a higher budget deficit, it should be noted that spending on human capital is an investment for the future. India’s public spending on health and education is below global standards, and improving it must be a high priority.

The writer is an economist and senior researcher at the Takshashila Institution.

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