The uncertain economic story
In its annual report, the Reserve Bank of India reiterates the first principles of economic policymaking. Not only can we not take economic recovery for granted, but even future shocks cannot be ruled out. Just a flattening of the infection curve will not lead to the restoration of a normal growth trajectory, and it will take a demand stimulus to do so.
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The Reserve Bank of India (RBI) Annual Report, released last week, has a detailed assessment on the state of the economy. The report (expectedly) lauds both the fiscal and monetary policy response to the pandemic’s economic impact. However, it does well to reiterate some basic principles of economic policy as far as dealing with a pandemic is concerned. It rightfully notes that “compared to financial crises, a health crisis can be more pervasive, persistent and debilitating in its impact on the real economy” and “letting down the guard is perilous; it is best to prepare for future waves”. This has both a short-term and medium-term message for policy-makers.
India paid heavily for letting down vigilance in the month of March when economic activity was finally beginning to gain momentum — as was a second wave. Any signs of revival in the infection curve must be nipped in the bud from now on.
Given the fact that the economy has been battered by two waves of the pandemic, it will be overly optimistic to assume that it will return to normal quickly. The policy hubris around a V-shaped recovery ought to be discarded. The report notes how “private investment is the missing piece in the story of the Indian economy in 2020-21” and “reviving it awaits an environment in which ‘animal spirits’ are rekindled and entrepreneurial energies are released”, clearly pointing towards a persistence of weak demand in the economy. RBI’s report is categorical that the second-wave’s economic impact being confined to the first quarter of 2021-22 is the “most optimistic scenario”.
These observations should provide clear guidance for economic policy. Not only can we not take economic recovery for granted, but even future shocks cannot be ruled out. Just a flattening of the infection curve will not lead to the restoration of a normal growth trajectory, and it will take a demand stimulus to do so. Because states have done most of the heavy lifting during the pandemic and are already pushed to their fiscal limits, only the Centre can lead the charge on this front. To be sure, the report seeks the cherished goal of “a secure path of strong and sustainable growth with macroeconomic and financial stability”. However, given the demand deficiency in the economy, a delayed stimulus is a bigger risk at the moment.