Revival of Indian economy will be possible if pandemic is contained, says MPC

RBI
RBI

The revival of the Indian economy will be sustainable if the COVID-19 epidemic is contained, noted famous economist Shashanka Bhide on Sunday, adding that in the medium term, prioritising expenditure to maximise employment and income effects while containing the pandemic is vital.

Bhide, who is also a member of the Reserve Bank’s Monetary Policy Committee (MPC), told PTI that high inflation is a major issue and that macroeconomic stability can be reached with a moderate level of inflation.

“Economic recovery would be sustained if the pandemic is contained. Prioritizing expenditure in the short run to maximise job and income effects while containing the pandemic is crucial “‘He stated.

Bhide stated that there are clear encouraging signals given the economic damage caused by the COVID-19 epidemic, both directly and indirectly through the setback to economies worldwide.

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“The positive signals are that output levels have recovered from the lows seen in Q1: 2020-21 and then fallen again during the pandemic’s second surge in April-May 2021,” he remarked.

According to Bhide, given that two of the first three months of 2021-22 were in fact pandemic severity maxima, the economy appears to have learned from previous experience.

India’s economy expanded by a record 20.1 percent in the April-June quarter, aided by a very low base last year and a strong rebound in the manufacturing and services sectors despite a catastrophic second wave of COVID-19.

The Reserve Bank of India (RBI) reduced the country’s growth forecast for the current fiscal year to 9.5 percent from 10.5 percent previously, while the World Bank forecasts India’s economy will expand at an 8.3 percent annual rate in 2021.

“We have not yet returned to the levels of activity experienced prior to the pandemic shock in Q1: 2021. Numerous sectors continue to have surplus capacity “Bhide explained.

In response to a query, Bhide stated that the economy is also vulnerable to inflationary pressures due to supply chain disruptions, decreased productivity of supply processes, and international commodity prices responding to a number of countries’ economic recovery.

“An increase in fuel prices has a greater impact because it affects expenses across multiple industries,” he explained, adding that high inflation is a major problem.

Bhide stated that high inflation combined with a low level of economic activity places a considerably larger strain on purchasing power, particularly on those whose incomes are stagnant.

“To control these consequences, steps to alleviate supply-side constraints would be required,” he said, adding that the banking sector should prioritise ensuring access to money to invest in alleviating supply-side constraints, both to alleviate inflationary pressures and to boost the recovery process.

When asked when private investment in India will resume, Bhide stated, “India will benefit from technological advancements and increased participation in global supply chain value chains. However, as growth accelerates in other economies, short-term flows may seek alternative destinations “‘He stated.

While an acceleration in investment is to be expected as spare capacity in enterprises declines, Bhide stated that what is critical for the economy at this point is to achieve sustainable growth with macroeconomic stability at a pace that assures India achieves its economic potential.

Concerning the mismatch between the real economy and the stock market, he stated that while stock markets obviously see the real economy returning to normalcy, they also see economic transformations that result in increased productivity and new opportunities.

“There is also the fact that financial markets are more globally interconnected and move at a faster pace than the real economy,” he explained.

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Bhide noted that while this disconnect is unsurprising, it is critical to remember that the economy must not just rebound to pre-pandemic levels, but also to levels compatible with its economic potential.

Regarding recent calls to use the massive forex reserves for infrastructure development or bank recapitalization, the eminent economist stated: “At the moment, the level of forex reserves should not be viewed as resources that can be tapped for these purposes, as the economy has not yet recovered to its pre-pandemic level and growth momentum.”

Noting that capital inflows and lower import demand during the epidemic aided in the increase of forex reserves, Bhide stated, “Forex reserve management should be guided by external sector financial stability considerations.”

In response to the government’s recently announced Asset Monetisation Pipeline programme, he stated that the asset monetisation pipeline provides a mechanism for obtaining much-needed funds for infrastructure development and expansion.

“The problem is balancing the two objectives of financial feasibility of the offers to investors and inexpensive access to infrastructure services,” he explained.

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