MUMBAI: High frequency indicators indicate a pick-up in economic activity triggered by absence of any signs of a second wave of the COVID pandemic and supportive macro economic policies. But reining in inflation would be the key challenge that could hurt the growth impulses that we are seeing, according to a report by the Reserve Bank.
“Abstracting from the inherent flux in high frequency indicators, the underlying trend would reveal that the pick-up in momentum of economic activity that commenced with the onset of the second half of 2020-21 is sustained” RBI said.” The absence of the dreaded ‘second wave’ of pandemic in India so far has imparted elevation to this momentum in an environment of supportive macroeconomic policies, spurring a faster unlock and normalisation of the economy”.
With the policy emphasis now shifting towards the more durable drivers of the economy, it is advisable now for private investment to turn its focus away from precautionary and deleveraging considerations to capex, capacity utilisation and building of new capacities, RBI said.
Recoveries led by investment turn out to be durable and lift both consumption spending and exports. The reforms in the domain of agricultural marketing and labour codes will bolster the efficiency and productivity gains.
In the time of the pandemic, financial saving of households and corporations have risen, waiting to be intermediated into productive investments rather than passive holdings of Statutory Liqidity Ratio (SLR) and non-SLR paper, according to the central bank.
With economic activities turning around, bank credit is slowly gaining traction. Forward earnings point to an improved outlook for companies. The supply of foreign saving is increasing, and foreign investment is upbeat on India. ‘Invest India’ – the national investment promotion and facilitation agency, emerged as the winner of the 2020 United Nations Investment Promotion Award.
Also, financial conditions embodied in interest rates are perhaps at their easiest in decades. Pandemics spread fear and risk aversion, but they also uncover new opportunities and new avenues for animal spirits.
At the same time, efforts need to be redoubled to excoriate the ‘worm in the apple‘ – inflation- before it hurts the impulses of growth that are taking root. Efficient, effective and timely supply management, including checking runaway retailer margins and reducing the incidence of indirect taxes on consumers, can break the back of the inflation pressures before they incipiently broaden and work against the intent of fiscal and monetary stimuli. Although still significant headwinds persist on the path to a durable recovery, steadfast efforts by all stakeholders could help in recouping lost incomes and/or putting back India on a faster growth trajectory.