Indian economy resilient and well prepared to tackle any headwinds from tapering process

NEW DELHI : The latest round of FICCI’s Economic Outlook Survey has put forth an annual median GDP growth forecast for 2021-22 at 9.1%. This marks a marginal improvement from the growth projection of 9.0% recorded in the previous survey round (July 2021).

Economic recovery, post the second wave of the pandemic, seems to be holding ground and the same is also reflected in the incoming data on various high frequency indicators. The forthcoming festive season should support this momentum.

However, with Diwali being a major festival and with some sense of complacency setting in with regard to the Covid situation, the likely surge in people’s movement can again lead to a rise in number of new covid cases. A note of caution continues to underline as far as the health and economic situation is concerned.

The median growth forecast for agriculture and allied activities has been put at 3.2% for 2021-22. Pick up in monsoon rains in the latter part of the season and subsequent increase in kharif acreage is likely to keep growth expectations of the agriculture sector upbeat. Industry and services sector are projected to grow by 12.9% and 8.6% respectively during the year.

The present round of FICCI’s Economic Outlook Survey was conducted in the month of September 2021 and drew responses from leading economists representing industry, banking and financial services sector.

The participating economists were also asked to share their opinion on upcoming monetary policy review and the future path of monetary policy.

There was clear unanimity that the Reserve Bank of India will maintain status quo on the repo rate and will continue with an accommodative stance in the forthcoming monetary policy.

Growth remains a clear priority for the Central Bank and the same has been clearly communicated in the past rounds of monetary policy announcements. The latest GDP numbers for Q1 of 2021-22 did report a robust y-o-y growth which was backed by a low base. However, on a sequential basis a contraction was reported in the GDP growth in the first quarter. Also, inflation – which is being seen as a major concern -has reported some easing over the last two months. Thus, an accommodative stance is widely expected to be maintained over the near term.

The second quarter GDP data and the upcoming festive season should give a clearer idea of where we are headed on the recovery path and how the demand situation is panning out. Moreover, we will also get greater clarity on the covid situation, and the possibility of a third wave post the festive season. Until then, the Central Bank could continue to resort to milder liquidity draining policies. Some participating economists also pointed towards RBI considering narrowing of the policy rate corridor by raising the reverse repo rate at the upcoming monetary policy review.

With regard to heading back to the process of normalization, it was largely felt that the Central Bank may indicate a change of stance from accommodative to neutral in the February 2022 policy meeting. However, a hike in the repo rate only looks imminent in the next fiscal year (April 2022). Also, the path towards positive real interest rates is expected to be a staggered one. Much would be contingent on the build-up in domestic price levels and the extent of tapering by the Federal Reserve.

The survey puts the median forecast for CPI based inflation rate at 5.6% for 2021-22, with a minimum and maximum range of 5.4% and 5.8% respectively. Retail prices are projected to ease slightly in Q3 2021-22.

On further steps that can be undertaken by the Central Bank to support growth, the participating economists believed that the Reserve Bank of India has done a commendable job in easing domestic economic and financial situation throughout the pandemic. It was pointed out that maintaining adequate liquidity would remain important going ahead even as the Central Bank moves towards normalization.

A majority of the economists felt that continued support remains especially critical for the MSMEs and the informal sector. Change in Classification Norms of MSMEs for NPAs, reduction in cash margins, change in personal guarantee requirements will go a long in alleviating some of the challenges being faced by these enterprises. The sector has undergone immense stress due to two consecutive covid-19 waves. It was suggested that the additional backstop facilities for MSMEs and stressed sectors (Kamath Committee) debt should be introduced.

Furthermore, on the tapering risks, most of the respondents believed that while policy normalization in advanced economies will weigh on asset prices and currency markets thereby prompting capital outflows from emerging markets, the impact of quantitative tapering on India is likely to be limited this time around. Economists cited that the taper chances are being well appreciated by market participants this time, which will act as a cushion for emerging market economies.

The high volume of foreign exchange reserves parked with the Reserve Bank of India will provide the much-needed resilience to the economy from any headwinds arising from the tapering process.

Moreover, comfortable current account position, effective intervention by the RBI in currency forwards market, IPO related flows and likely inclusion of India in global bond indices should help curtail any significant depreciating bias on the India Rupee. However, the participants cautioned that uncertainties revolving around the Chinese economy as well as surging global inflationary levels are some of the external risks to watch out for.

Economists suggested while forex reserves could provide a cushion to extreme volatilities in the currency market, the country should continue to encourage stable longer term capital inflows while discouraging volatile short-term flows. For this, developing a conducive environment for investments is of utmost importance which will aid in successfully tackling of the situation. Moreover, enhancing the scope for utilizing domestic currency for trade payments could also prove to be beneficial during the process.

Lastly, rising inflationary pressures has emerged as one of the key macroeconomic concerns in the recent times. The participating economists were asked to share their views on the nature of inflation.

While economists participating in the survey were undivided on the fact that the current rise in prices was driven due to challenges emancipating from the supply side constraints, they were divided on determining the very nature of the inflation trajectory. With fresh infection cases now abating along with pick up in monsoon rains in the month of September as well as availability of sufficient capacity in the system, a group of economists felt that inflation levels (particularly food inflation) will continue to moderate, going forward. Greater availability of idle capacity will also keep business away from any significant increase in prices of final goods.

However, other respondents felt that while rising price levels initially had a transitory component from the pandemic induced supply disruptions, the nature of inflation might have turned more lasting over the past few months. Increasing global commodity prices- be it crude oil, industrial inputs, metals, agricultural produce (food and raw materials)- has lifted the overall price levels globally and is also percolating into India’s domestic market. This remains a major risk factor on the inflation front. This group felt that elevated inflationary levels in spite of high base effects contradicts the idea of inflation being transitory in nature and therefore seems to be stickier than what was previously anticipated.


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