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Economic recovery in India fraught with uncertainty, with inflation being biggest challenge in coming months
A persistent negative impact of COVID-19 on investment, human capital, and other growth drivers could prolong the uncertainty of recovery and impact medium-term growth
The recent high frequency indicators suggest an ongoing economic recovery in India, but pressures of inflation have been elevated along with several other uncertainties. Though IMF assessment for India after Article IV Consultations said ‘inflation eased to 5.6 per cent in July returning to within the RBI’s inflation target of 4±2 per cent’ it should not be a matter for complacency either for the government or the people. We need to tread carefully.
It should be noted that since IMF’s transparency policy allows the organization deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions, we are still in the dark; however, what has been disclosed has served sufficient warning about the issues with the Indian economy.
For example, first, the RBI’s inflation target itself is too wide, 50 per cent below and 50 per cent above 4 per cent, while actual inflation was 5.6 per cent. Secondly, 5.6 per cent inflation at a time when interest rates for even small savings including fixed deposits in banks is less than this level, meaning their accounts will have net negative earnings, is dangerous for common people.
It is therefore clear that the Modi government and the RBI need to take several urgent policy initiatives in the near future to overcome the precarious situation.
One may not agree with the IMF’s commendation of the Modi government for the “authorities’ economic response, which was swift and substantial, has included fiscal support, including scaled-up support to vulnerable groups, monetary policy easing, liquidity provision, and accommodative financial sector and regulatory policies. Despite the pandemic the authorities have continued to introduce structural reforms, including labour reforms, and a privatisation plan.”
This commendation is even contrary to the views of critiques – farmers are agitating against the farm laws, workers against the labour codes, and all non-BJP political parties and academicians are opposing the indiscriminate sale of the public sector. The debate on this is not out of the scope of this article, because it concentrates on the risks only, which even IMF has mentioned as a warning signal.
Though the growth has been projected at 9.5 per cent in 2021-22 and 8.5 per cent in 2022-23, after an unprecedented contraction of 7.3 per cent in GDP in the pandemic year 2020-21, the contraction in the economic activity, lower revenue, any pandemic-related support measures are estimated to have led to a widening of the fiscal deficit to 8.6 and 12.8 per cent of GDP in 2020-21, for the Centre and the states respectively.
It is another area of concern, which cannot be neutralized without a paradigm shift in the current policies adopted by the Modi Government.
Robust economic activities need sufficient amount of money flow. However, despite the policy support, “bank credit growth has remained subdued, while large corporate have benefited from easier conditions in capital markets.” Such a comment even by IMF is not a happy situation, because our country does not only need corporate, but also MSMEs and other small businesses.
Modi government must note this anomaly to boost small business and enterprises, vendors, et al to support the badly-needed job creation and their retention. Financial gaps must be narrowed to allow inclusive growth to all, not only the corporates.
IMF says that “the net inflows and improvement in the current account have supported an increase in foreign exchange reserves. The current account balance is projected to return to a deficit of about one per cent of GDP in 2021-22, due to gradual recovery in domestic demand and higher oil prices.”
Even in this matter, the situation is far from equitable, since petroleum prices are charged 30 per cent higher to common people in comparison to the airplanes. The government policies clearly support air transport and penalize surface transport.
Moreover, economic outlook remains clouded due to pandemic-related uncertainties contributing to both downside and upside risks, the IMF report has mentioned. A persistent negative impact of COVID-19 on investment, human capital, and other growth drivers could prolong the uncertainty of recovery and impact medium-term growth.
While India benefits from favourable demographics, disruption to access to education and training due to pandemic could weigh on improvements in human capital, IMF has warned. It means India needs to resort to large-scale skilling of the present workforce to enable them to get jobs in the present changed circumstances, or else the government will need to support the livelihood of the unskilled or lesser skilled people.
India is projected to be one of the fastest growing major economies for this year and beyond; however, this tag is deceptive, because the benefits are not equitably distributed. IMF’s guarded suggestion for a “more inclusive and sustainable growth, while keeping public debt vulnerabilities in check” is therefore important in this backdrop.
IMF’s directors indicated that further fiscal support underpinned by targeted spending on social protection, employment support and health spending is warranted until the recovery is secured. They encouraged Indian authorities to increase public expenditure in infrastructure, education, health, and social safety nets which can also help achieve the Sustainable Development Goals (SDGs).
Fiscal space can be enhanced through a credible and clearly communicated medium-term fiscal consolidation strategy, enhancements in expenditure efficiency, improved public financial management and revenue enhancing measures, IMF has suggested. Elevated inflation pressures need to be closely monitored. It suggested foreign exchange interventions limited only to addressing disorderly market conditions.
While supporting the general financial sector policies, specifically mentioning corporate sector, IMF has indicated that policies facilitating the exit of non-viable firms are warranted. They have observed that ensuring adequate bank capitalization and effective NPL resolution will enable the financial system to further increase its resilience and better support the recovery.
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