Beneath the recovery

The Indian Express     28th December 2020     Save    

Context:  Inflationary concerns could begin to dominate as the growth recovers.

Ways in which India stood out during COVID 19 Pandemic

  • Success in dealing the pandemic: Broken the link between rising levels of mobility and COVID-19 cases and ensured free movement without the rise in COVID cases. (e.g. successfully celebrated Diwali festival)
  • Smallest fiscal support package in the world: Central government spending is flat.
  • Hit with Inflation: Consumer prices are above the 6 % tolerance level for the past eight months.

Problems associated with rising Inequality due to low fiscal spending:

  • Urban poor was left out: For E.g., demand for the rural employment guarantee programme continues to outstrip supply.
  • Rise in Inequality between large and small firms:
    • Large listed firms saw a bigger rise in profits (50 %, year-on-year) while there was acute economic stress for smaller listed firms and unlisted informal firms.
    • Spending moved from small firms to large ones, and smaller firms remain vulnerable to delays or defaults on payments.
  • Low demand in future: Due to the poor performance of labour-intensive small and informal firms. E.g. Informal sector employs around 85 % of the labour force.
    • E.g. the sales of more expensive passenger vehicles doing better than motorbike sales.
  • Could stoke inflation: Inflationary concerns could reappear in 2021 due to the following reasons.
    • Release of pent-up demand for high-touch services: after vaccine comes into play.
    • More demand for services by large firms and their employees: Consumption patterns show that the rich in India tend to consume more services than the poor.
    • Service providers may reset the prices: which they didn’t do in 2020.

Way forward: for Reserve Bank of India to control inflation.

  • Take steps to gradually drain the excess liquidity in the banking sector.
  • Provide a floor for short-term rates, which have fallen below the reverse repo rate.
  • Narrow the policy rate corridor by raising the reverse repo rate.

Conclusion: India should differ from the rest of the world by quickly exiting from loose monetary policy.