‘Recent shifts in macroeconomic landscape brightens outlook’

The recent shifts in the macroeconomic landscape in India has brightened the outlook, with GDP “in striking distance of attaining positive territory”, and inflation easing closer to the target.

Further, financial markets remain ebullient with EMEs (emerging market economies) receiving strong portfolio inflows and India on track for receiving record annual inflows of foreign direct investment, the Reserve Bank of India said in its latest bulletin for January released.

Vaccination drive

In its article on the ‘State of Economy’, the bulletin suggests that the shape of recovery would be v-shaped and wouldbe aided by the country’s vaccination drive, which is likely to be the biggest in the world, backed by its comparative advantage of having the largest vaccine manufacturing capacity and a rich experience of mass inoculation drives against polio and measles.

“Recent shifts in the macroeconomic landscape have brightened the outlook, with GDP in striking distance of attaining positive territory and inflation easing closer to the target. If these movements sustain, policy space could open up to further support the recovery,” said the RBI bulletin.

Highlighting some of the key drivers, the report said merchandise trade rebounded in early January, attesting the slow healing of domestic demand and the unlocking of export energies. Current account surpluses are ebbing as domestic activity regains vigour. Foreign investment flows are already scenting the imminent upturn. Further, the recent new highs, scaled by equity markets, are driven by optimism around early Q3 corporate earnings results, with IT majors, including Tata Consultancy Services, Infosys and Wipro, recording strong growth.

Agriculture production

The GDP growth in the second half of FY22 would benefit from statistical support, and is likely to be mostly consumption-driven. With rabi sowing surpassing the normal acreage way before the end of the season, bumper agriculture production is expected in 2021.

“India being the global capital for vaccine manufacturing, pharmaceuticals exports is expected to receive a big impetus with the start of vaccination drives globally. Agricultural exports remain resilient, and under the recent production-linked (PLI) scheme, food processing industry has been accorded priority. Harnessing the synergies by transforming low-value semi-processed agri products through food processing would not only improve productivity, but also boost India’s competitiveness,” the bulletin pointed out.

There is an urgent need to kickstart investment to secure a durable turnaround and a sustainable growth trajectory. India must look for ways in which cash sitting idle in the balance sheets of corporations and banks and reverse repo balances with the Reserve Bank find their way into credit to productive sectors and into real spending on investment activity before it imposes a persistent deflationary weight on real activity.

While stress in the financial sector’s balance sheet could intensify as the camouflage of moratorium, asset classification standstill and restructuring fades, but banks have entered the health crisis with stronger capital buffers than the global financial crisis.

Loan recoveries

Slippage ratios have been falling and loan recoveries are improving even as provisioning coverage ratios have risen above 70 per cent.

“Capital infusion and innovative ways of dealing with loan delinquencies will occupy policy attention in order to ensure that finance greases the wheels of growth on a durable basis before the demographic dividend slips away,” it said.

While it may take years for the economy to mend and heal, innovative approaches could help convert the pandemic into opportunities. It needs to be seen if the Union Budget 2021-22 could be a game-changer.

COMMENT NOW