There are signs of improvement seen in Indian economy and the financial markets are also showing resilience. Yet there are challenges posed as regards dealing with the second wave of covid19 and completing the vaccination drive as early as possible along with uneven recovery across sectors in domestic economy and nations in the global economy. In its bi-monthly Monetary Policy Resolution the Reserve Bank of India (RBI) has kept the benchmark interest rate under the liquidity adjustment facility (LAF) unchanged at 4 per cent. Consequently, the reverse repo rate under the LAF also remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate continue at 4.25 per cent. The RBI thus is apparently trying to keep adequate liquidity particularly in the segments that are starved of funds while at the same time not losing its focus on its role of anchoring inflation expectations at 4%. This seems to be working in favour of maintaining credibility of market participants in the central bank.
Growth Prospects Mounting in Domestic Economy
According to the RBI, economic activity picked up pace in the period June to July due to easing out of the pandemic containment measures in select states. Monsoons also turned more favourable in the month of July and the cumulative rainfall up to August 1, 2021 was almost close to the long-period average. The pace of sowing activity for crops has since picked up and there is buoyancy seen in rural demand, notably in tractor and fertiliser sales.
Industrial production also has expanded in double digits year-on-year basis in May 2021 on top of the massive jump in April, largely due to strong base effect as economic activity was severely affected in May 2020 on account of the pandemic effects. Though it was still 13.9 per cent below its May 2019 level, yet it can be seen as an impressive bounce back considering that India still has to grapple with second wave of covid19 in some of its states where economic activities are still subject to restrain in one form or the other.
The manufacturing purchasing managers’ index (PMI) that which had fallen below the magic figure of 50 in June 2021 has for the first time in 11 months, bounced back into expansion zone with a reading of 55.3 in July. Yet there are other strong indicators such as e-way bills, toll collections, electricity generation, air traffic, railway freight traffic, port cargo, steel consumption, cement production, import of capital goods, passenger vehicle sales, two wheeler sales and so on which also have registered strong growth in the period June-July.
These developments reflect that Indian economy has found ways to carry on business adapting to COVID related protocols and taking advantage of easing of containment where possible.
Yet there are Other Challenges to cope up with
Services PMI has remained in contractionary zone due to COVID-19 related restrictions still continuing in many states, but the good thing is that the pace of contraction has decelerated as it improved to 45.4 in July compared with 41.2 in June 2021. The quarterly results of non-financial corporates for the first quarter of the current fiscal also show healthy growth in sales, wages and profitability particularly in the information technology firms.
The headline CPI inflation was at 6.3 per cent in June after having risen by 207 basis points in May 2021. It has further eased to a three-month low of 5.59 per cent in July due to moderation in food prices. Though it is now within the band of plus-minus 4 per cent yet it will be challenging to keep it contained within reasonable levels so as to obliterate pressure on the central bank to raise the policy rates and thus continue its accommodative instance.
Global Economy is on Recovery Path on a Bumpy Road
The global economy is on the recovery path but the pace of recovery is not only uneven but also uncertain. There are two limiting factors to growth which are common to all – one, the access to vaccines and two, the financial resources available to governments. The higher the access to vaccines to the people and the availability of required resources with the governments, the better it is for an economy and vice versa.
Even as the unprecedented rise in the stock indices and rising commodity prices are indicative of the prospects of the global economy turning bright, the second wave of the virus is posing new challenges for the people, workers and corporates. It is so peculiar an instance that on one hand millions of workers have dropped out of the global labour force while on the other hand, many companies are struggling to fill up the job openings even across some of the advanced economies.
This kind of scenario has left the economists at global agencies so confused that they are refraining from making a categorical statement about whether the global economy will be perform better or worse in the current and the following year. Take for instance the World Economic Forum (WEF) Chief Economists Outlook June 2021 report. Well, on one hand, it talks about consensus among its Chief Economists Community tending towards an expected average global growth rate in the range of 5.5% to 6% in 2021 (or possibly higher) and a recovery of global GDP to pre-COVID levels within the first half of 2022, yet, on the other hand it also says that such recovery will depend heavily on progress with vaccine roll-outs and the impact of future mutations.
Even as the governments in several countries, particularly in high-income countries, have supported the recovery in economic activities through elaborate and timely measures yet there are concerns raised about how effectively the stimulus packages will be able to generate the required amount of recovery commensurate with output gaps and the economic and social transformation that they are expected to achieve. Yet on the other hand there are Low- and middle-income countries who faced difficulty in allocating enough funds to deal with the immediate health crisis and so they may continue to need financial support from the international community.
Moreover, even as the flagship international financial institutions extend them support in the forms of loans, there may be issues with respect to whether these countries will be able to generate enough growth rates to be able to repay such loans when they become due for payment as they need to focus more on meeting the emergency (short term) needs that may necessitate direct transfers to the covid19 infected/affected people. According to WEF report, such countries need more of grants and aids rather than loans from international agencies to be able to sustain themselves particularly in the pandemic times even as many a countries are trying to move towards greater protectionism to support their respective domestic economies from the wrath of the Pandemic.
Can Stock Markets be considered as Barometer of the Economy?
The indices in the stock market in many emerging markets including India are soaring high. The governments need to ensure that the funds they are planning to allocate to the various people or sectors that got affected/infected by the pandemic are supported in a manner that there is minimal waste and maximum gains generated in terms of increase in the productivity/production so that inflationary pressures are not mounted so as to dampen their long term development and more so sustainable development.
In India the system liquidity remained ample, as observed by the RBI, with the average daily absorption under the LAF increasing from ₹5.7 lakh crore in June to ₹6.8 lakh crore in July and further to ₹8.5 lakh crore in the first week of August. As on July 16, 2021, money supply (M3) and bank credit by commercial banks grew by 10.8 per cent and 6.5 per cent, respectively. There is an increase in India’s foreign exchange reserves by US$ 43.1 billion in 2021-22 (up to end-July) and they have mounted up to US$ 620.1 billion. As of now the inflation is projected to be below 6 percent for the rest of the fiscal, yet it is very close to the benchmark level.
According to the recent release of the Index of Industrial Production, manufacturing, which comprises 77.63 per cent of IIP, rose by 13 per cent in June after an increase of 34.5 per cent in May. Mining output increased by 23.1 per cent and power generation have also increased by 8.3 per cent in June. It is important to keep the positive trends in industrial production growth rates going up, the food prices under restrain and speed up vaccination drive in order to forge ahead on a bumpy road in an assertive manner.