India’s central bank has expressed satisfaction over the country’s recovery from the Covid-19-induced slowdown, but believes inflation needs to be kept in check. The Reserve Bank of India’s bulletin for December says more evidence of a recovery has emerged since its November bulletin and that the economy is “reflating at a pace that beats most predictions.”
This recovery may help post a minor growth in the third quarter. “The nowcasting assessment presented in last month’s bulletin indicates that real gross domestic product growth is expected to break out into positive territory in Q3 – albeit, to a slender 0.1%,” it stated.
Although there are headwinds, “steadfast efforts by all stakeholders could put India on a faster growth trajectory,” the report added. The central bank said efforts need to be stepped up to fight inflation so that it does not affect growth impulses. It said, “A combination of rising international commodity prices and increasing pass-through to domestic manufactured goods and services prices, firms striving to recoup lost incomes by raising margins, and demand normalizing is adding to core inflation pressures.”
The report noted that agriculture has remained resilient and robust in the face of the pandemic, while the manufacturing sector has started turning around. “Sectors such as auto and capital goods, which had been hit hard by the lockdown are expecting a turnaround in forward earnings. Healthcare, information technology and fast-moving consumer goods companies are expecting stronger earnings outlook,” it added.
The bulletin also pointed out that the consumer sentiment has improved in the November 2020 round of the Reserve Bank’s consumer confidence survey from an all-time low in the previous round. It said, “Households are now more confident about the year ahead, with expectations of improvement in the general economic situation, employment conditions, income scenario and spending.”
As for the global economy, the report noted that though the second waves of virus outbreaks have checked the pace of recovery, the outcome of the US elections and the successes in Covid-19 vaccine trials have ignited global markets. “Risk appetite has roared back, sending deluges out of safe haven assets into stock markets and emerging market economies. There is growing confidence that an end to the health pandemic is in sight and prospects for the global economy are finally looking up on a viable basis,” the report stated.
India’s lower than expected contraction in the second quarter has given rise to a sense of optimism and many brokerages have now revisited their fiscal year forecast for India. While the ADB and Moody’s have narrowed their contraction predictions, S&P has retained it at 9%. Japanese brokerage Nomura is hopeful that in the next calendar year India will be the fastest-growing Asian economy and register growth of 9.9%.
However, former chief statistician of National Statistical Office and noted economist Pronab Sen has warned that India’s current macroeconomic situation is very uncertain and expects the country’s gross domestic product to contract 10% for the current fiscal year, as against the 7.5% forecast by the central bank. He called for extreme caution as he felt “there is too much optimism going around.”