Editorial: Cautious optimism

Just a flattening of infection curve will not lead to restoration of normal growth trajectory

Though the Reserve Bank of India sounded quite optimistic in its latest ‘State of the Economy’ report about recovery and inflation, the expectations need to be realistic and grounded. The devastating impact of the pandemic has added an element of uncertainty to the recovery process. As a result, we cannot take economic recovery for granted nor can we afford to rule out future shocks. Just a flattening of the infection curve will not automatically lead to the restoration of a normal growth trajectory, and it will take a demand stimulus to do so. Already, India has paid heavily for letting down the guard in March when economic activity was beginning to gain momentum and the impact of the second wave is still being felt. Given the fact that the economy has been battered by two waves of the pandemic, it will be unrealistic to assume that it will return to normal quickly with a V-shaped recovery. The States have done most of the heavy lifting during the pandemic and are already pushed to their fiscal limits. It is for the Centre to lead the charge on this front. The stimulus packages, unveiled earlier, fell short of expectations, and could not provide the required boost. The government must loosen its purse strings and spend enough to help tens of millions of poor and low-income households.

A steady decline in the daily cases of Covid-19 across the country is expected to release the pent-up consumer demand but the threat of price pressures building up in the economy cannot be wished away. The spike in consumer food price and retail in the past few months has coincided with a record contraction of the economy and a trend of unemployment and depressed rural wages. The central bank has so far calibrated its monetary policy on the grounds that the uptick in inflation is transitory in nature and is likely to abate as supply-side disruptions ease. However, the trends suggest that inflation may well prove to be sticky on the downside. Price pressures may build up in the economy during the second half of the year, making it difficult for the RBI’s Monetary Policy Committee to continue to justify its current policy stance. The long-term costs of inflation cannot be ignored. As the country is grappling with an excruciatingly slow recovery process, certain trends provide silver lining amidst dark clouds: manufacturing activity is gradually turning around; supply situation is improving with monsoon catching up to its normal levels and sowing activity gaining pace; corporate India has weathered the storm of the second wave in a far better manner compared with the first.

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