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Picture imperfect? While acknowledging the recovery trends in Indian economy, many experts are sceptical of the sustainability of the growth outlook in the context of multitude of macro-economic challenges. Image Credit: AP

Dubai: India’s economy withstood the onslaught of COVID-19 in two waves when economic activity was brought to a grinding halt in 2020 and in the first half of 2021.

While the government statistics show the economy has caught up with the pre-pandemic growth levels in the second half of 2021 and that its size in absolute terms has almost matched with the pre-pandemic year (2019), the big question before economists and policy makers is that can the country sustain its growth momentum in the face of the resurgence of the pandemic through a newer and highly infectious Omicron variant combined with impending macro-economic challenges such as spiralling commodity prices and spiking inflation.

Policy direction

While India was largely praised by global multilateral institutions and think tanks such as The World Bank, The International Monetary Fund and The World Economic Forum for the robust policy response to the healthcare and economic challenges in the face of the first and the second wave of COVID-19, experts say sustaining these will be a huge challenge for India if the pandemic is to persist through 2022 as the government and the central bank are headed for both fiscal and monetary policy fatigue.

Faced with new challenges, the economy and corporate India are eagerly waiting for fiscal policy directions from the government through the Union Budget announcements and the direction of stimulus through monetary policy by the Reserve Bank of India.

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 see a strong recovery in the coming months and even going past the pre-COVID levels. The argument is justified through the growth of 20.1 per cent the economy recorded in April-June 2021 quarter against a 25 per cent contraction in the same period a year ago. While an 8.4 per cent growth in the July-September quarter has reinforced the sustained growth trend, other key indicators such as export earnings and recovery in government revenues are seen as clear indicators of the economy’s forward march.

Growing scepticism

While acknowledging the recovery trends in the economy, many experts are sceptical of the sustainability of the growth outlook in the context of multitude of macro-economic challenges in the context of limited policy options.

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

In a recent interview to India Today, former Reserve Bank of India (RBI) governor Raghuram Rajan said that there is nothing to boast about India’s V-shaped recovery. “Create a bad enough downturn and the economic recovery will always be V-shaped,” he said.

The former RBI governor thinks addressing the challenges on the job creation front should be a priority for the policy makers. He said that the population dividend only becomes a dividend when jobs are created.

While the pent-up demand played a crucial role in the first and second quarter growth numbers driven largely by festival season spike in consumer demand, economists fear the fresh wave of infections combined with rising prices will significantly slow down the upward surge in aggregate demand, effectively slowing the overall economic momentum.

Limited options

The dovish monetary policy by the Reserve Bank of India (RBI) has been a key part in stimulating the overall economic activities. The rising prices have seen growing demand for inflation control.

“The central bank faces an urgent task — immediate inflation control, which is also its primary legislated mandate. Core inflation in India was elevated even before global inflation started to tick up. Inflation expectations have risen over the pandemic. Monetary policy needs to be normalised quickly as any delay risks even bigger rate hikes down the road, which could be painful,” Pranjul Bhandari, chief India economist, HSBC Securities and Capital Markets (India) Pvt Ltd wrote in a recent column.

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

On the fiscal policy front, the government’s ability to further stimulate the economy will depend on its ability to find additional sources of government revenue while maintaining the fiscal deficit with in its target. While tax revenues have improved in the last two quarters, the projected revenue from public sector asset sales (asset monetisation) are yet to reach the target levels. The tone of government’s fiscal policy to face the impending challenges is expected to become more apparent in the Union Budget 2022-23.