Macro View: More proof of growth rebound, rising costs a threat

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November 01, 2021 4:30 AM

The government is apparently confident that the country is poised for stronger growth, thanks to a raft of structural reforms undertaken, which could enable efficiency and productivity, capex push, financial sector clean-up and vaccination drive.

If government consumption, the usual saviour in times of crisis, was sluggish in the June quarter, it is likely that the September quarter GDP will draw significant support from this pillar, given that the Centre and states have ramped up spending in recent months.If government consumption, the usual saviour in times of crisis, was sluggish in the June quarter, it is likely that the September quarter GDP will draw significant support from this pillar, given that the Centre and states have ramped up spending in recent months.

Though there is no ample proof as yet of private investments picking up decisively, a slow recovery of consumption post the June quarter, as signalled by assorted high-frequency indicators such as a steady rise in inter-state trade in goods and services, increase in sales by organised-retail sector and a rather sharp rise in imports have amplified the feasibility of an all-encompassing economic rebound. A turnaround is visible in manufacturing and construction industries as well, while some of the services sectors too are looking up.

In the short term, thankfully, the government-sector could make up for the still-elusive private investments through aggressive capex deployment, thanks to a surge in tax revenues.

The National Monetisation Pipeline, if implemented with gusto, could ensure government resources for investments will remain steady even in the medium term.
The sanguine suppositions about short-term economic prospects and government finances could, however, go awry if crude oil, coal and natural gas continue to remain expensive in the global markets for a long period or become even dearer. Such a scenario could also dent corporate profitability, besides stoking generalised inflation.

If the RBI’s and IMF’s predictions of a real GDP expansion of 9.5% in FY22 hold good, that would mean that the country would record a net GDP growth of 1.6% over the pre-pandemic (FY20) level.

If government consumption, the usual saviour in times of crisis, was sluggish in the June quarter, it is likely that the September quarter GDP will draw significant support from this pillar, given that the Centre and states have ramped up spending in recent months.

The government is apparently confident that the country is poised for stronger growth, thanks to a raft of structural reforms undertaken, which could enable efficiency and productivity, capex push, financial sector clean-up and vaccination drive.

In the October 2021 issue of its World Economic Outlook, the IMF predicted the Indian economy would become the ‘global growth leader’ (by outdoing China), from FY22 onwards, and might retain this position for the next five years. However, a medium-term growth of 8% as envisaged by government managers, could be an over-estimate, since structural issues continue to hobble the economy, and a way out of this could take longer. The hit taken by the informal sector, a key constituent of the economy, owing to demonetisation, GST and Covid-19 could also be drag on economic expansion.

While the RBI has stood the government in good stead by making available abundant liquidity, by keeping interest rates low and reining in the government’s borrowing costs, it could come under increasing pressure, given that its counterparts in key markets are resorting to winding down the liquidity overhang.

The growth of eight infrastructure industries during April-September 2021-22 stood at 16.6%, as against a contraction of 14.5% in the year-ago period. The index of industrial production (IIP) grew 11.9% in August, against 11.5% in the previous month, driven by a favourable base; IIP also rose 3.9% from pre-pandemic (same month in FY20). With the excess rainfall affecting mining, electricity and construction activities, and the non-availability of semiconductors impinging upon auto output, analysts see IIP growth to dip sharply to 3-5% in September 2021.

It is a welcome development that appreciating that banks and NBFCs now pose a lesser downside risk to the real economy thanks to the steps taken by the government and the banking regulator to repair their impaired balance sheets, Moody’s Investors Service in its latest review affirmed India’s sovereign rating at Baa3, the lowest investment grade, while upgrading the country’s outlook to ‘stable’ from ‘negative.’

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