A prolonged coronavirus pandemic, monetary policy tightening by central banks of advanced economies, escalating commodity prices and outbreak of geopolitical tensions may somewhat dampen the growth forecasts for India, an economist at the global accounting and consulting firm Deloitte has cautioned.
Economist Deloitte India, Rumki Majumdar has said that the projections of a 9.2 per cent recovery in FY2021-22 and between 8-8.5 per cent for FY2022-23, with exports and investment driving economic growth and consumer demand recovering with a lag were in line with the forecasts for the world’s fifth-largest economy. However, a global liquidity squeeze may result in capital outflows to exert downward pressure on the Indian rupee. This may be aggravated by lopsided growth among industries and rising social inequality.
The high inflation caused by supply-side disruptions since the onset of the pandemic in 2020 may not have required the Reserve Bank of India (RBI) to intervene proactively, this was expected to change as the economy recovered.
“India must brace for higher inflation with a strong possibility of pent-up demand exceeding supply and geopolitical tensions resulting in higher commodity prices. Disruptions in the global supply chain will further add to the challenge” economist Deloitte India Rumki Majumdar has said.
A strong rally in demand has constrained supplies in the US and EU because of global supply chain disruptions, leaving the policymakers there a worried lot. A similar situation could likely be witnessed here, with persistent inflation irreversibly reinforcing inflation expectations.
“Deloitte predicts high inflation over the next two years backed by a strong economic rebound,” opined Majumdar. “With the rising pressure to tighten the monetary stance, policymakers will have difficulty in calibrating policy choices to balance between growth and stability objectives.”
While the past two years witnessed counter-cyclical spending by the Central Government to absorb the pandemic’s impact, a more calibrated approach would be required in the future.
“While India needs sustained efforts to kickstart the virtuous cycle of demand creation and investment spending, at the same time, the government has to plan for a timely exit. A prolonged fiscal deficit can concern investors, raise sovereign yields and increase borrowing costs,” emphasised Majumdar.
“The government will have to consolidate its position so that expenses do not result in crowding out of private investment and adding to inflationary pressures,” she added.
Majumdar is hopeful that the Central Government would reiterate fiscal consolidation and focus its resources on productive investment in the Union Budget 2022 proposals on February 1.