By BW CFO World Online Bureau
Bhide of MPC said that prioritising expenditure was necessary in the short term to get maximum jobs and income effects to curb high inflation and facilitate recovery of the economy
Revival of the Indian economy would be sustained if the Covid pandemic is under control, Shashanka Bhide, member of MPC said. He also said that prioritizing expenditure and income effects to get maximum jobs is necessary in short term.
Bhide, who is a member of the Monetary Policy Committee (MPC) of the Reserve Bank explained that high inflation is a crucial concern and macroeconomic stability can be achieved when there is moderate level of inflation.
He said that revival of the economy would be sustained if the pandemic is under control. He also said that there are clear positive signs given what the economy has suffered due to the pandemic, not only from direct impact but also the repercussions from the set back to the economies around the world.
“The positive signs are indeed the recovery in the output levels from the lows that we saw in Q1: 2020-21 and then the fall again during the course of the second surge of the pandemic in April-May 2021,” he noted.
Furthermore, he believes that given the two of the three months of the first quarter of 2021-22 were in fact peaks for the severity of the pandemic, the economy appears to have managed to learn from the previous experience.
The Indian economy grew by a record 20.1 per cent in the April-June quarter, helped by a very weak base of last year and a sharp rebound in the manufacturing and services sectors in spite of a devastating second wave of COVID-19.
The Reserve Bank of India has lowered the country’s growth projection for the current financial year to 9.5 per cent from 10.5 per cent estimated earlier, while the World Bank has projected India’s economy to grow at 8.3 per cent in 2021.
“We are yet to get back to the activity levels seen prior to the pandemic shock in Q1: 2021. There is still excess capacity in many sectors,” Bhide said.
Replying to a question, Bhide said that the economy is also vulnerable to inflationary pressures as there are disruptions in supply chains, reduced productivity of supply processes and international commodity prices responding to economic recovery in a number of countries.
“Fuel price increase has a larger impact as it affects costs across many sectors,” he said, adding that high inflation is a crucial concern.
Bhide said high inflation with a low level of economic activity puts much greater pressure on the purchasing power, especially on households whose income levels are not rising.
To contain these effects, measures would be needed to remove supply side bottlenecks,” he said, adding that ensuring access to funds to invest in easing supply side constraints is something the financial sector should focus on, both to ease inflationary pressures and also help the recovery process.
Asked when private investment will pick up in India, Bhide said, “India would benefit from the technology and participation in global supply value chains. But as expansion in the other economies also gathers pace, the short-term flows may find other destinations attractive.”
While acceleration in investments should be expected as excess capacity in firms reduces, Bhide said what would be important for the economy at this stage is to achieve sustained growth with macroeconomic stability to reach a pace that ensures India reaches its economic potential.
On the disconnect between the real economy and the stock market, he said stock markets clearly see the real economy moving back to normalcy rapidly, they also see transformations in the economy that lead to higher productivity and new opportunities.
“There is also the fact that the financial markets are more closely connected globally and move more rapidly than the real economy,” he said.