2021 – Looking Back: Economic recovery nascent, faces fresh challenges

Soaring inflation, driven by elevated input prices, could further pressure private consumption.

Even fixed investments, despite recent improvement, grew only marginally in the September quarter from the pre-Covid level, as private investors continued to remain risk-averse. With the favourable base effect waning, pace of industrial production, too, tripped in October.
Even fixed investments, despite recent improvement, grew only marginally in the September quarter from the pre-Covid level, as private investors continued to remain risk-averse. With the favourable base effect waning, pace of industrial production, too, tripped in October.

Economic recovery gained some traction in 2021 (barring the June quarter when the second Covid wave struck hard), culminating in an 8.4% year-on-year expansion of real GDP in the September quarter. With further headway in the vaccination drive, the economy is expected to beat the pre-pandemic level in the second half of FY22 unless the new Covid strain – Omicron – plays spoilsport. But subdued private consumption (it was down by 3.5% from pre-Covid level in Q2FY22), the principal pillar of the economy, suggests the recovery is yet to take roots. Soaring inflation, driven by elevated input prices, could further pressure private consumption.

Even fixed investments, despite recent improvement, grew only marginally in the September quarter from the pre-Covid level, as private investors continued to remain risk-averse. With the favourable base effect waning, pace of industrial production, too, tripped in October.

Going forward, ensuring a steady recovery in private consumption as well as investment, smoothening supply-chain bottlenecks for sustained export growth, curbing inflationary pressure and tackling new Covid varieties remain the biggest challenges for policymakers. Managing markets volatility in the wake of the US Federal Reserve’s tapering of its monthly asset purchases and any tightening of interest rates by central banks across key economies to tame soaring inflation will only complicate the job of RBI and the government and pose downside risk to growth.

Rural demand paints a mixed picture. Tractor sales dropped 22.5% on year in November and non-durables output rose just 0.5% in October. An earlier analysis by Bank of America reveals the increase in rural wages has been slowing, averaging 2.7% y-o-y in the April-July period, against 7.4% a year before. But continued direct transfers through the PM-Kisan scheme are seen as propping up demand.

Work demand under the rural job scheme moderated in November from a year before, reflecting a pick-up in demand for non-farm labour. Rabi crop sowing has risen by about 6% from a year before, aided by good reservoir levels, raising the prospect of a bumper production.

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