Sustainable Growth Recovery Will Need Government Support
For a country that has the second highest infections globally, the Indian economy is doing rather well. Nomura India Normalization Index (NINI) suggests that consumption and investment indicators are already fast-approaching pre-pandemic levels, and while the services sector is lagging on the supply side, the industrial sector is already clawing back lost ground.
Aurodeep Nandi (Economist and Vice President at Nomura) writes “a protracted period of ultra-accommodative monetary policy has led to a fall in real lending rates and spreads for corporates and households that should eventually come as lagged relief to the interest-sensitive sectors. With vaccine inoculation now set to reach the masses, an ‘ultimate unlock’ of the economy should eventually occur, and lagging sectors such as travel, tourism and hospitality will finally emerge out of the pandemic’s shadow. As other countries too start benefiting from the ‘vaccine pivot’, India’s export growth and capex cycle should also start recovering. A spate of reforms undertaken so far on labour, manufacturing, and broader ease of doing business should also fan some of these tailwinds. Overall, we project real GDP growth to pick up by a stellar 13.5 per cent y-o-y in FY22 after averaging -6.7 per cent in FY21.”
However, cautions Nandi “the nascent growth recovery will still need support……..India is most likely living through a classic K-shaped recovery, wherein corporates and households with stronger balance sheets have recovered more robustly, while smaller firms and poorer households probably remain trapped in a vicious cycle of poverty and indebtedness instigated by the pandemic. The World Bank estimated in its January 2021 outlook that close to 100 million people will sink below the poverty line ($1.90 per day) by the end of the year in South Asia…….
“This means that the budgets for spending heads such as subsidies, employment generation, rural development and other social sector programmes are likely to remain large……”
