Context

We are now at that point in the cycle where all central banks — the RBI, the US Fed, the European Central Bank, Bank of England and others — have begun to signal, a process of normalisation from the unprecedented loose monetary policy stimulus post the onset of the pandemic in early 2020.

Recovery momentum

• Surveys and data prints are now signalling that the recovery momentum in the first half of 2021 is decelerating in many countries, although the direction and momentum may vary.
• The RBI Governor notes that “the external environment, which had been supportive of aggregate demand over the past few months, may lose momentum for a variety of reasons”.
• China — its policy and economy — is the most salient risk for a sustained global recovery.
• The Chinese authorities’ seeming determination to push ahead with structural reforms, de-carbonising initiatives, and curbs on real estate appear designed to sacrifice some short-term growth for medium-term efficiencies, and reduce financial risks and inequality.
• Inflation in almost all major economies continues to remain high.
• The US Personal Consumption Expenditure (PCE) survey measure of core inflation is running over 4 per cent.
• The story is similar in Europe.

Assessing India’s growth recovery

• India’s growth–inflation dynamics are also becoming favourable, but are still subject to multiple risks.
• In assessing India’s growth recovery, a risk of the global economy going into “stagflation”, going by US signals seems to be that if at all, it is likely to be mild.
• The recovery of economic activity continues, although the high-frequency indicators we track suggest that the momentum observed in July and August has moderated.
• Electricity consumption growth is also down from August levels, but part of this can be explained by both cooler, rainy weather, as well as coal shortage related cutbacks in many electricity-intensive manufacturing.
• The residential real estate is reportedly doing exceptionally well, with low-interest rates on home loans, cuts in stamp duty and registration charges, and indeed behavioural shifts towards own home ownerships with hybrid and work from home shifts.
• Even the commercial real estate sector is reviving.
• The Union government also has large unspent cash balances, which can be judiciously deployed to boost both capex and consumption.
• The overall inflation trajectory suggests a gradual glide path towards the 4 per cent target by March 2023 or a bit beyond.
• There are risks of overshooting this forecast trajectory, despite a benign outlook on food prices.
• This emanates from global metals, minerals, crude oil prices, and from supply bottlenecks persisting till well into 2022.

Conclusion

In summary, the growth–inflation signals remain mixed. Multiple episodes of global spillovers in the past couple of decades have taught us that imminent normalisation will have implications for all emerging markets.

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