The optimism that was distinctly visible in the last quarter of 2020-21 has been considerably whittled down by the second wave of the pandemic in April-May period. The GDP forecasts by both Indian and international institutions have got reduced accordingly; RBI’s current projection of growth for 2021-22 is 9.5% and that of World Bank is 8.3%. Both the projections are against the backdrop of a 7.3% decline in GDP growth in 2020-21. Which essentially means one would be marginally ahead of 2019-20 GDP level. However, this growth projection is predicated by the resumption of normal economic activities and a controllable third wave of the pandemic. Both of which are critically dependent on the progress of vaccination and improvement in overall healthcare. It is getting increasingly realised that vaccination and extension of healthcare facilities are going to be key drivers of macro economic success in near future. Opening up of labour intensive sectors, particularly services and construction need an active vaccination thrust. In India 93% of workforce happens to be in unorganised sector according to Economic Survey 2018-19; they need free vaccination without which growth process will be stymied.

Another economic issue which is of concern at the moment is the sudden escalation in WPI and CPI based inflation rates in May. WPI has touched 12.94% and CPI inflation (rural and urban combined) is at 6.3%. Supply chain disruptions due to partial lockdown and cost push could be the main reasons. However, it should be borne in mind that a part of the cost push has happened due to an increase in global prices over which we have little control.

Both WPI and CPI have been affected by the sharp price increases in mineral oil, edible oils and pulses. In all the three areas we are import dependent. In case of petrol and diesel the Central and the State taxes have made the situation more difficult. It is indeed possible to bring both petrol and diesel under GST without significant revenue loss. Even if one leaves out food and fuel which have a certain degree of volatility, core CPI inflation is hovering around 6% and core WPI inflation will be around 10%. In view of the rising liquidity in the economy the inflationary phenomenon is likely to be sustained. Given the possibility of a scenario of low growth and elevated inflation, the policy makers have to be careful about stagflation setting in. It may be necessary to tolerate a limited amount of inflation provided growth continues to pickup. In this context both fiscal and monetary policies need to have an accommodative stance.

For GDP to grow at 9.5% its key drivers consumption and investment demonstrate to show the required uptrend; the assumption that net exports will play a relatively modest role may not be out of sync. Consumption particularly private consumption which has been the mainstay of growth in recent years declined by 9% between 2019-20 and 2021-22, albeit Government consumption has grown but its contribution in terms of percentage share of overall consumption is somewhat limited. In the medium term private consumption is unlikely to accelerate unless employment, livelihood opportunities and income get into higher growth trajectories. This will necessitate normalisation of activities across sectors such as services and MSME industries. To elaborate, services account for around 54% share of GDP, further services GDP also used to have the highest growth rate amongst the sectors in the pre-covid days, currently about 25% of services is fully operational, the rest are partly operational or closed due to lockdown restrictions. The first quarter of 2021-22 has been marked by a contraction in consumption and possibly an increase in household debt. So the growth will have to be made up in the coming three quarters, which is a tall order indeed.

So far as investment is concerned Gross Fixed Capital Formation (GFCF) as percentage of GDP in current prices has declined from 29.2% in 2018-19 to 27.1% in 2020-21. Domestic private capital was a bit hesitant even before covid started; however, currently Government investment has started taking a lead role so it is expected that private investment will get tethered to it, particularly in infrastructure and housing sectors. The recent Budget has attempted to provide a clear thrust in the area of capital expenditure. Some of the recent policy changes which include PLI and Aatma Nirbhar Bharat were introduced to support investment in manufacturing. These along with an accommodative monetary policy, expectation of a better future and improvement in retained earnings in 2020-21 and 2021-22 first quarter could have a positive impact on private corporate’s investment behaviour. FDI on the other hand continues to be bullish on India. However, credit demand from household units and MSMEs are still somewhat restricted. Which shows that they are not able to expand the balance sheet under current circumstances. In other words, notwithstanding the spurt in Government investment and accommodative monetary policy the revival process will take time.

At this stage the key question that arises is - do we have sufficient macroeconomic robustness to overcome another wave of the pandemic and still remain on the projected growth path? From the point of view of macroeconomic stability there are some interesting developments, the current account deficit has been managed quite well in 2020-21, in fact we even had a surplus in couple of quarters, this has been to an extent helped by a contraction in both exports and imports. The foreign exchange reserves at $577 billion was at a record high level in March 2021, this trend continues. Viewed against high crude price and vegetable oil price this should provide the necessary confidence to handle higher import values.

The tax revenue collection is unlikely to fall significantly short of the Budget estimate. Given a 9.5% real GDP growth and elevated inflation leading to about 5% to 5.5% escalation in GDP deflater, the nominal GDP will grow by 14.5% to 15%. This is marginally higher than Budget estimate of 14.4%. Given a tax buoyancy of 1.2, the tax revenue will grow by 17.5 to 18%. To this will get added non-tax revenue and non-debt receipts. The last item which includes disinvestment can be volatile but its share in the total revenue collection is limited. Given this scenario the Government has sufficient headroom to to stretch expenditure levels without stretching the fiscal deficit level of 6.7% drastically. This additional expenditure can be used for free vaccination and sustainable demand generation when the economy opens up.

The obverse of the additional stimulation measures will be an increase in Government borrowings, which can affect bond yields. RBI has been careful in this area, along with traditional OMOs, innovative measures like G-Sec SAP, etc have been used judiciously. Basically as long as direct monetisation of deficit is avoided one is in safe waters. RBI has been quite prudent in the management of liquidity till date, there is no reason to believe why things would be different in future. It is now widely recognised that for investments to be competitive the long term borrowing costs have to come down.

Lastly, we need to keep in mind that vaccination, improved healthcare, employment and income generation are our key objectives, the macroeconomic processes have to be dovetailed with it. This will require certain amount of flexibility in setting macroeconomic targets in unusual times.

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