BackA Shakespearean take on the Indian economy
A report put out by RBI sees our winter of discontent yielding to a glorious summer, but we need reforms if our ambition is not to overleap ability after a V-shaped recovery from covid
PremiumA Shakespearean turn of phrase has given the January bulletin of State of the Economy put out by our central bank a whiff of fresh air. “Recent high-frequency indicators suggest that the recovery is getting stronger," it waxes poetic, “...and soon the winter of our discontent will be made glorious summer." That the hurly-burly of covid—the worst of its impact, barring another wave—is behind us is borne out by data. Footfalls in public places are back to 87% of the usual in India’s six largest states. Brisk expansion in e-way bills points to accelerating domestic trade. “The recovery is no longer aloft on the fleeting tailwinds of festival spending," says the report, “but is rising Phoenix-like on the wings of an intrinsic momentum." This ebullience is drawn from our vaccination programme, its ‘V’ signifying a V-shaped revival. While some doubts still hover in a fog of data, it is clear that our upswing is past Act I, ready for another stage, and within sight of a climax.
The report lays out four causes for optimism. First, our covid curve has ducked a second wave of infections so far. Instead, we have “bent it like Beckham", with year-end active cases down to almost a quarter of their September peak, even as our rate of recovery stays high and that of mortality low. Second, government expenditure rose a dramatic 48.3% in November from a year earlier, after shrinking for four consecutive months. Capital spending, in particular, expanded almost 250%, thanks in large part to the Centre’s stimulus efforts. Third, merchandise imports snapped a nine-month downtrend to show a 7.6% rise in December. And fourth, bank credit growth has gone above the 6% mark for the first time in two quarters. This rate is not very strong, but is a positive sign all the same. Recent readings of our purchasing managers’ indices, viewed alongside all-time high GST revenues last month, lend the bulletin’s sunny outlook credence, for they suggest more than just a spring-back of repressed demand. Plus, consumer confidence is headed back up from a crevice, supply chains have linked up again, and business gloom has begun to lift. All this could explain why the report spies a possibility of double-digit expansion in 2021-22 after a high single-digit contraction this fiscal year. If that happens, we would have lost only two years to the pandemic.
The path our economy will take after we ascend the ‘V’, however, is the big question. Growth had been in decline before the viral scourge, after all. Calls abound for a big fiscal stimulus, and while aggregate demand does need a boost, this can’t be the be-all and end-all of our response. To sustain a pace consistent with pre-pandemic goals, we need to raise overall efficiency in our use of all inputs that go into output. This would require a larger share of resources being allocated by markets, and thus by private rather than state decisions. Ergo, businesses must rebegin investing. On this, the central bank’s report is not too sanguine. With firms sitting on reserves and banks parking huge surpluses with it, ways must be found to channel this money into productive activity, it notes. The reduction of interest rates has all but exhausted its efficacy as a spur. Without a return of animal spirits and reforms of our financial system, credit may simply fail to regain its verve. As India’s eyes turn to next week’s budget, other market reforms are must-dos, too. Lest vaulting ambition o’erleaps itself once a ‘V’ of covid relief is secured.
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