Smoother Sailing in Rough Waters

Context: The pace of post-pandemic normalisation has been swifter than expected and a cyclical recovery may ensue.

Prospects of India’s Recovery:

• A double-barrel V-shaped (one V over the other) recovery has been observed for India.
  • The inner V displays the path back to pre-pandemic activity levels.
  • The outer V involves cyclical bounce back in business cycle that had started long before pandemic.
  • GDP growth slid persistently from 8.2% y-o-y in Q12018 to 3.1% in Q12020.
  • Although India experienced one of the largest growth contractions among emerging markets in 2020, the larger decline sets stage for a larger bounce in 2021. 
• Key themes ensuring softer recovery in coming months

1. 1. Pre-sourcing vaccine doses: Government is expected to inoculate 400-500 million people by July 2021, creating a vaccine pivot in the second half of next year.

• • As vaccine coverage increases, a spurt in growth of contact-intensive services such as travel and hospitality, should be witnessed.

1. 2. Easy financial conditions and a reduced fear factor: should boost consumption growth.
   3. A stronger global economy in 2021: due to wider availability of vaccines in mid-2021 boosting consumer and business confidence.

Apprehensions in recovery of Indian Economy:

• The festive season has left in its aftermath a renewed pandemic threat and a lost consumption boost.
• Government’s ?12 trillion of market borrowing for FY2020-21 seems inadequately for the sharp decline in revenues, with lesser government expenditure expected in the near future.
• India’s pre-pandemic crisis, a triad of weak balance sheets of corporates, banks and shadow banks are hidden behind moratoria, credit guarantee schemes and procedural delays to recognition of bad loans.
• In the absence of income growth, the debt service burden is likely to increase, and the unsecured retail loan segment is under pressure.
• Elevated inflation is also constraining conventional monetary policy space.

Way Forward:

• Distribution challenges in vaccine deployment should be taken care of as a prerequisite.
• Lower incomes and sluggish job creation are areas that need to be paid attention.
• Pressure need be put off debt service and unsecured retail loan segment, inflecting the credit cycle.
• Risk of financial sector accidents involving banks and financial intermediaries should be reduced.
• Government’s factor market reforms need to be accompanied by last-mile delivery.

Conclusion: Despite growth recovery, the narrow revenue base implies government will remain saddled with Hobson’s choice between fiscal consolidation and fiscal activism.