The economy may bounce back quickly

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The economy may bounce back quickly

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• Hit hard: Indian economy was one of the worst-hit in 2020, and the several localised lockdowns worsened the situation further. Then, the curve started to flatten, despite the medical emergency not getting over. A second wave is menacingly over the horizon, even as an effective vaccine is awaited.
• Optimism visible: It seems that the bounceback in economy may happen quickly. By end-October, economic activity had come back to 83% of 2019 levels, and the contactless economy is doing well. Travel, tourism, hospitality, live events, fashion, real estate are struggling.
• Three speed recovery: The RBI predicts that Indian economy will witness a three-speed recovery. For FY21, the contraction will be 9.5% or more. The Q1 contraction of 23.9% was the sharpest globally, but the worst is behind us. Real GDP contraction will now decline, and Q4 may see some positive growth. The IMF in its October WEO gave a 10.3% contraction in economy. (WEO - World Economic Outlook)
• Inflation story: The retail inflation (7.3% in Sept) stayed above RBI's tolerance limit of 6%. Supply chain disruption was the key reason. But high farm output will now suppress food inflation, and hence overall inflation too. RBI is hence patient for now. Government is not pushing RBI either.
• Steps taken to help: The GoI has put aside fiscal consolidation for now, and raised the annual borrowing target from Rs.5.4 tr to Rs.12 trillion. Revenues are sharply down, and so are disinvestment proceeds, but govt. expenditure is likely to exceed budgeted figures. GoI may borrow Rs.1.1 tr from the market to make up for GST shortfall (and payment to states) but the stock markets won't like it. Sovereign ratings downgrade may also happen.
• May's Atmanirbhar package: A total package of Rs.21 trillion was announced, including RBI's liquidity injection of Rs.8 tr. It was made up of relief, rehabilitation and structural reforms. Poor were given free foodgrains, and some DBT. Attempts were made to inject liquidity into the MSME sector of India. Then came the major farm law reforms, to free up agri marketing, contract farming and essential commodities.
• RBI's aggressive liquidity push: It has injected Rs.11 trillion into the economy via LTRO, TLTRO, OMO, forex purchases, CRR reduction, SLR exemption, NABARD refinance, mutual funds' liquidity, higher WMAs for governments, and regulatory forbearance in the form of moratorium for borrowers.  [LTRO - Long Term Repo Operations, TLTRO - Targeted LTRO, OMO - Open Market Operations, WMA - Ways and Means Advances]
• Summary: This combination of government and RBI's actions will lead to a faster emergency, but the medical emergency must be handled properly too.

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