Tuesday, January 25, 2022

India’s Growth Trajectory

Script: Lekha Chakraborty
Professor, NIPFP and Research affiliate, Levy Economics Institute of Bard College, New York

Macroeconomic uncertainty in the time of pandemic is hard to measure. Against the backdrop of this pandemic, the World Bank predicted better growth for the Indian economy, between 7.5 per cent and 12 per cent.

The Department of Economic Affairs Secretary Shri Tarun Bajaj mentioned that not just rating agencies, World Bank and IMF have also predicted better growth for the Indian economy. He mentioned that the Indian economy has been slowing, partly due to the collapse of large non-bank financial firms and the shockwaves it sent through the financial system.

The pandemic mitigation measures like Lockdown also deepened the crisis due to contracting output, and shrinking investment. The most impacted sub-sectors included aviation and tourism, hospitality, trade, and construction. The industrial sector was also deeply disrupted by lockdown and restrictions in mobility. Agriculture, however, was mostly unaffected.

With an all-time high record collection of Goods and Services Tax (GST), the growth will be on a better trajectory. The latest South Asia Economic Focus report released ahead of the annual Spring meeting of the World Bank and the International Monetary Fund (IMF), said that the Indian economy was already decelerating, even prior to the COVID-19 pandemic. After reaching 8.3 per cent in FY17, growth slowed down to 4.0 per cent in FY20, due to a decline in private consumption and the shocks in the financial sector, the report said.

The macroeconomic situation however is not yet stable, because it is a dual crisis – a public health crisis and a financial crisis. With the appropriate fiscal and monetary policies, India can go back to a sustained economic growth path. The sustainability of the growth trajectory will depend on the epidemiology of the virus and the policy certainty.

It also depends on how the vaccination programme unfolds, how the exit strategy with new restrictions to mobility are removed, and how quick the recovery of the global economy happens, the World Bank said. However, India has bounced back from the deep recession due to the unprecedented decline in economic activity.

The monetary policy stance is accommodative. Due to abundant international liquidity conditions and stable capital inflows, the external front will normalize and the Current Account Deficit will be around 1 per cent of GDP, in FY23, the World Bank articulated in its report. The Foreign Direct Investment inflow is comfortable.

On the fiscal front, the general government deficit is expected to remain above 10 per cent of GDP until FY22, the report said. The public debt is projected to be around 90 per cent of GDP in FY21. This “fiscal dominance” with high deficits is crucial when monetary policy has limitations in triggering economic growth. It is interesting to recall the perspective of Finance Minister Smt Nirmala Sitaraman in her Bloomberg interview “not to fear deficits” in the time of the pandemic.

The widening inequalities in the time of pandemic is a matter of concern. However as economic growth resumes and the labour market prospects improve, the inequalities would reduce in course of time. The World Bank report said that the poverty rate (at the USD 1.90 line) is projected to return to pre-pandemic levels in FY22, falling within 6 and 9 per cent, and fall further between 4 and 7 per cent by FY24.

Small firms and business enterprises are affected disproportionately. To mitigate the social and economic impacts of the pandemic induced macroeconomic crisis, the Reserve Bank of India (RBI) provided liquidity infusion into the economy along with the adjustments in policy rates (mainly repo and reverse repo rates) and other regulatory support (including forbearance measures). The government of India has announced in the Union Budget 2021-22 an increased spending on health and social protection through expenditure re-prioritisation and enhancing fiscal space.

In the growth trajectory ahead, the downward risks are the financial sector risks, challenges to a sustained recovery in private corporate investment, and the new waves of Covid-19 infections.

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