Context

Many developed countries are poised for strong growth. This will compel their respective central banks to begin normalizing the extremely loose monetary policies. This will require a reorientation of India’s stimulus strategy.

Global growth momentum

• On the global front, the growth momentum has been strong, particularly in the US and China, although recent data suggest this has peaked or is even stalling.
• Post the perceived hawkishness of the last US Federal Reserve policy meeting, the traded interest rate of the benchmark US 10-year treasury bond fell to below 1.3 percent.
• The falling rate reflects disquiet about the durability of the recovery once the fiscal stimulus starts waning.
• China recently announced a 0.5 percent cut in the required reserves ratio for banks.
• Europe’s recovery had begun to inch up, but members of the European Central Bank have begun to push back on market expectations of early tapering.
• However, some smaller global central banks have started normalizing their respective Quantitative Easing programs.

Growth momentum in India

• The encouraging aspect of the recovery is the resilience of many mid-and large-turnover companies in the face of the debilitating public health crisis
• In India, there are signs that the recovery momentum began to strengthen from mid-June, and of demand accelerating, despite capacity utilization in many industries below thresholds needed for the next round of private investments.
• In line with the market consensus, we think that 2021-22 growth is likely to be in the 9-10 percent range.
• Tax collections, another indicator of activity, even if a bit skewed, support this view.
• A revival of retail consumer demand is critical for sustaining the recovery. Reports from industry associations suggest a somewhat mixed picture.
• Demand emanating from rural geographies is important for sustaining recovery.
• Demand for work under MGNREGA suggests continuing stress.
• Monsoons will be a big contributor.
• The sowing of Kharif crops stalled in late June but is predicted to pick up again in mid-July.
• Renewed government intervention is required.

Factors deciding the trajectory of recovery

• Inflation: Rising inflation could force a monetary policy normalization faster than presently anticipated.
• Global recovery: Effects global central banks’ policy tightening will only add to the difficulty of balancing a policy-induced increase in interest rates, moderating financial markets volatility, and maintaining growth incentives.
• Access to credit: Access to credit remains a crucial input in the recovery matrix, particularly for small and micro-enterprises.
• The Union government’s Emergency Credit Line Guarantee Scheme (ECLGS) has reportedly been very effective in stabilizing the solvency (and cash flows) of micro and small businesses.

Way forward

• Expansion of subvention scheme: The expansion of subvention (ECLGS) is probably the most effective template to incentivize credit flows, leveraging on the government’s balance sheet to take on the first loss risks.
• At the same time, capex proposals of the Centre and states should gradually draw in private sector capex.
• Policy intervention to create a level field: Corporate health has improved, with lower debt on balance sheets.
• Adoption of technology is widespread; this will boost productivity and competitiveness.
• But these factors reinforce trends in consolidation and market power.
• It will require policy interventions to create a more level playing field for smaller companies, which is crucial for job creation.

Conclusion

Policy support will thus need to adapt from the “revive” to the “thrive” phase, to place India on a sustained 7 percent-plus growth path.

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