The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC), in its first forecast after the Covid-19 pandemic, has projected a 9.5% contraction for the Indian economy in the current fiscal year. This number is in line with other projections and should settle the debate about the impact of the pandemic on the economy, for it is now clear that the Indian economy is going to face its worst-ever contraction. RBI governor Shaktikanta Das also ruled out any V-shaped recovery — which reflects an immediate revival in growth — and indicated that different sectors will follow different revival trajectories and the overall performance will be a sum of these parts. He also acknowledged the possibility of a second wave of the pandemic derailing the ongoing gradual revival from the 23.9% contractionary shock in the first quarter of the current fiscal year.
The crux of RBI’s assessment is that while the worst is over, the economy is not out of the woods yet. Policy intervention, going forward, needs to have two objectives. It should ensure that things do not get worse. This will require controlling the pandemic (there is little RBI can do in this regard) and mitigating the impact of the pandemic’s current and future economic shocks on important economic institutions. The ongoing Supreme Court case where RBI is arguing against a stay on classifying loan defaults as non-performing assets is a critical factor vis-à-vis financial sector stability. Another factor, which has been highlighted by economist Pranjul Bhandari, is the risk of India facing another taper tantrum-like situation in the near future as advanced economies raise interest rates and inflation proves to be more than a transitory phase in India. A capital flight triggered by the coming together of these two factors could give a jolt to the stock market, which crossed the psychological 40,000-mark once again last week.
To be sure, the government has undertaken critical reforms in sectors such as agriculture and labour during this period. This newspaper believes that they have the potential to unleash long-term gains. Any such gains, however, can be jeopardised if India’s financial sector problems, especially growing bad debt in banks is not addressed. If there is one lesson from India’s experience after the 2008 economic crisis and its aftermath, it is that a credit boost to unviable businesses cannot lead to a sustainable growth revival. This is also why the question of boosting demand continues to be critical.
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