Time to let economy continue on its recovery path

Tuesday evening all ears across the length and breadth of India were hooked on to the television sets. The sudden announcement over Prime Minister Narendra Modi's address to the nation had drawn them to the TV sets. Whether there would be a fresh round of lockdown across the country that remained the moot question and curiosity. Few States have already declared partial or complete lockdowns. The Prime Minister made it clear that lockdown should be the last resort and the onus would be on the individual citizens to ensure that yet another lockdown is done away with and the economy is not impacted as severely as it had been last year.

Mind you those countries across the world are witnessing the second and third waves of the pandemic, amidst battling the deepest economic recession since the Second World War. Small businesses, in particular, are the worst affected across countries, sectors and segments. And India is no exception.

Recent developments have already posed uncertainty to India's growth prospects. Concerns over disruptions to businesses and supply chain have heightened from the recent restrictions imposed to curb the possibility of a 2nd wave of Covid-19 cases in India. The number of businesses disrupted, as per the Dun & Bradstreet Covid-19 business disruption tracker, which had fallen steeply to 13 per cent in the 1st week of March 2021 from the level of nearly 31 per cent witnessed in the previous two months, is now expected to rise sharply. Furthermore, inflationary pressures are flaring up. While domestically, firms are regaining pricing pressures, the surge in global crude oil and industrial input prices are rekindling cost push inflationary pressures. India's industrial production is yet to record a stable growth. Long term yields are hardening leading to rise in borrowing costs. In this context, the Reserve Bank of India faces the difficult task of managing the inflationary pressures while preventing a rise in the borrowing cost. Despite the rising inflationary pressures, RBI is likely to keep the policy repo rate unchanged in the forthcoming monetary policy review. It is also expected that the RBI will resort to a calibrated withdrawal of the surplus liquidity in the system during FY22.

Many economic experts forecast that global economic activity will surpass its 2019 level in 2021, on the back of improving performance in China, the US and India. However, Dun & Bradstreet suggests, while early optimism about the global recovery being supported by Covid-19 vaccines is already priced into financial markets, it could yet dissipate, as it is quite apparent the roll-out will not be rapid even in the most advanced countries. This is resulting in a third wave in Europe, as new cases are rising in India, where it had been hoped that herd immunity had been achieved naturally.

The vaccine supply chain is both delicate and subject to existing and potential export controls, and India and Europe are critical suppliers. Delays to a successful global vaccination programme raise the spectre of new variants and fresh lockdowns beyond Europe, and may well confound the recovery in oil prices further above $60/barrel. It will therefore be a tough call for the government to let the economy survive and continue on the recovery path, while doing away with a healthcare disaster.