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Indian Economy Outlook 2021
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Indian Economy Outlook 2021
The global economy, struck by the Covid-19 pandemic, witnessed a V-shaped recovery due to unprecedented public policy support in 2020. Although the medical emergency is still not over in many parts of the world, ammunitions like vaccines and drugs for therapeutic use are available to protect the people from the repeated onslaught of the virulent coronavirus with new variants.To get more news about forex trading, you can visit wikifx.com official website.
Riding on the success of ultra-accommodative monetary and fiscal policies, the World Economic Outlook of the IMF in April 2021 predicted a robust world output growth of 6 per cent in 2021. Following disruptions in economic activities due to repeated waves of the pandemic in many countries, it has become doubtful whether global growth in 2021 would reach 6 per cent. While the premature withdrawal of public policy support is not desirable, the policy space — both monetary and fiscal — is limited around the world.
Currently, fiscal rectitude appears remote. But fiscal profligacy for a longer period is also not affordable without inflicting harm on the global economy in the medium-term. The debt-GDP ratio has crossed the danger mark in many countries, which calls for fiscal restraint. Many central banks find it difficult to pursue ultra-accommodative monetary policy as retail inflation has reached/surpassed the tolerable level. Moreover, loose monetary policy has been contributing to the asset price bubble that may cause global financial instability going forward.
Debate has started about the US Fed normalising its monetary policy at the earliest as the headline consumer prices in the US rose by 5 per cent in May and 5.4 per cent in June 2021 — the highest since 2008 and well above the target of 2 per cent. The European Central Bank is also contemplating the tapering of its bond purchases to keep inflation around the 2 per cent target.
The Indian situation is largely similar to the evolving global outlook. Indias real GDP growth is unlikely to reach double-digit in FY22 as predicted earlier due to the devastating second wave leading to local lockdowns in most parts of the country. Although the daily corona caseload has declined significantly, the lockdown is being lifted in a calibrated manner. Even if the third wave is averted, the Indian economy may grow at a high single-digit in FY22 as against a contraction of 7.3 per cent in FY21.
After the second wave, India‘s near-term outlook on growth has become uncertain. Many professional forecasters, including the RBI, have pruned India’s growth forecasts from 10-12 per cent to 8-9.5 per cent in FY22. The Monetary Policy Committee has extended its support for growth with an accommodative monetary policy stance and an unchanged repo rate at 4 per cent since May 27, 2020. On top of a liquidity provision of over ₹13.6 trillion in FY21, the RBI has made over ₹7 trillion additional liquidity provision in FY22 so far.
The government has extended the RBIs mandate to achieve 4 (+/-2) per cent CPI inflation during the next five years. One of the key assumptions of the inflation targeting to be successful is the absence of fiscal dominance. This is unlikely to be achieved so soon in India due to repeated pandemic-ravaged supply shocks. On top of the 6.8 per cent fiscal deficit proposed in the FY22 Budget, the government may have to incur additional expenditure to contain the damage done by the Covid second wave besides additional borrowing of ₹1.58 trillion for compensating States. As the revenue shortfall is now certain, the Central Government may have to borrow more than ₹13.58 trillion in FY22.
The RBI currently faces a severe conflict between monetary policy and public debt management. Managing a huge government borrowing programme of over ₹13 trillion for the second year in succession at the lowest possible cost is impossible without injecting additional liquidity. Besides large profit transfer to the government on May 21, excess liquidity would certainly add to inflationary pressures in the economy.
The CPI inflation above 6 per cent during May-June was well outside the upper limit of the target range. The WPI inflation was over 12 per cent in the period. Inflationary pressures are building up in the economy for several reasons. First, petrol and diesel prices have started pushing up prices of all commodities due to an increase in transportation costs. Second, the high base effect of CPI inflation is being eased quickly. Third, input costs have increased for many commodities. Fourth, the core inflation in the CPI basket is already high. Fifth, rural wages have started rising in the recent period. Sixth, international crude oil prices may rise further in 2021.
All-out efforts should be made by both Central and State governments to forestall the occurrence of the Covid third wave. They have to reduce taxes on petrol and diesel at the earliest. The long-term solution lies in bringing petrol/diesel within the ambit of GST. The RBI should also plan for a non-disruptive withdrawal of Indias ultra-loose monetary policy similar to other major central banks of the world.