Imperfect image? While acknowledging the recovering trends in the Indian economy, many experts are skeptical of the sustainability of growth prospects against the backdrop of a host of macroeconomic challenges.
Image Credit: AP

Dubai: India’s economy withstood the two-wave Covid-19 onslaught when economic activity was paralyzed in 2020 and the first half of 2021.

While government statistics show that the economy has caught up with pre-pandemic growth levels in the second half of 2021, and its size in absolute terms has almost matched the year before the pandemic (2019), the big question for economists and policymakers is whether the country can maintain its growth momentum in the face of the resurgence of the pandemic thanks to a newer and highly infectious Omicron variant combined with looming macroeconomic challenges such as soaring prices. commodities and soaring inflation.

Political orientation

While India has been widely praised by global multilateral institutions and think tanks such as the World Bank, the International Monetary Fund and the World Economic Forum for the strong policy response to the health and economic challenges facing the first and second wave of COVID -19, experts say sustaining them will be a huge challenge for India if the pandemic is to persist until 2022, as the government and central bank head for fiscal and monetary policy fatigue.

Faced with new challenges, the Indian economy and businesses are eagerly awaiting the government’s fiscal policy directions through the Union budget announcements and the direction of stimulus measures through the Reserve Bank of India’s monetary policy. .

The government, the RBI and key industry bodies such as the Federation of Indian Chambers of Commerce and Industry (FICCI) maintain that the economy is expected to experience a strong recovery in the coming months and even exceed the levels of ‘before COVID. The argument is justified by the 20.1% growth of the economy recorded in the quarter from April to June 2021 against a contraction of 25% during the same period a year ago. While 8.4% growth in the July-September quarter reinforced the trend for sustained growth, other key indicators such as export earnings and recovery in government revenues are considered clear indicators. of the forward march of the economy.

Growing skepticism

While acknowledging the economic recovery trends, many experts are skeptical about the sustainability of growth prospects against the backdrop of a host of macroeconomic challenges against the backdrop of limited policy options.

Dr Arvind Subramanian, former chief economic adviser at the finance ministry, warned in a recent lecture he gave at the Indira Gandhi Institute for Development Research in Mumbai against over-optimism on economic recovery on the grounds that India’s national income accounts are resting on shaky legs and, even on their basis, the economy has barely recovered to pre-pandemic levels.

In a recent interview with India Today, former Reserve Bank of India (RBI) Governor Raghuram Rajan said there was nothing to brag about in India’s V-shaped recovery. . “Create a sufficiently severe downturn and the economic recovery will always be V-shaped,” he said.

The former RBI governor believes addressing challenges on the job creation front should be a priority for policymakers. He said the demographic dividend only becomes a dividend when jobs are created.

While pent-up demand played a crucial role in the growth figures for the first and second quarters, mainly due to the surge in consumer demand during festival season, economists fear that the new wave of infections combined with the rise in prices significantly slows the rise in aggregate demand, effectively slowing the overall economic dynamics.

Limited options

The accommodative monetary policy of the Reserve Bank of India (RBI) has played a key role in stimulating all economic activity. Rising prices have resulted in an increasing demand for inflation control.

“The central bank is faced with an urgent task: the immediate control of inflation, which is also its main legislative mandate. Core inflation in India was high even before global inflation started to rise. Inflation expectations have increased during the pandemic. Monetary policy needs to be normalized quickly because any delay could lead to even larger rate hikes, which could be painful, ”wrote Pranjul Bhandari, Chief Economist for India, HSBC Securities and Capital Markets (India) Pvt Ltd.

With global and domestic inflationary trends on an upward trajectory, how long can the RBI continue with its loose monetary policy remains an open question.

From a fiscal policy perspective, the government’s ability to further stimulate the economy will depend on its ability to find additional sources of government revenue while keeping the budget deficit within target. While tax revenues have improved over the past two quarters, projected revenues from sales of public sector assets (asset monetization) have yet to reach target levels. The tone of the government’s fiscal policy to deal with looming challenges is expected to become more apparent in the Union budget 2022-2023.