- 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 per cent.
- The falling rate reflects disquiet about the durability of the recovery once the fiscal stimulus starts waning.
- China recently announced a 0.5 per cent 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
- The encouraging aspect of the recovery isthe 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 ofdemand accelerating, despite capacity utilisation 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 per cent range. Tax collections, another indicator of activity, even if a bit skewed, support this view.
- A revival ofretail 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.
- Sowing of kharif crops stalled in late June, but is predicted to pick up again in mid-July.
- Renewed government interventionis required.
Factors affecting recovery:
- Rising inflation could force a monetary policy normalisation faster than presently anticipated.
- 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 remains a crucial input in the recovery matrix, particularly for small and micro enterprises.
- The Union government’sEmergency Credit Line Guarantee Scheme (ECLGS) has reportedly been very effective in stabilising the solvency (and cash flows) of micro and small businesses.
- The expansion of subvention (ECLGS) is probably the most effective template to incentivise 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.
- 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 createa more level playing field for smaller companies, which is crucial for job creation. Policy support will thus need to adapt from the “revive” to the “thrive” phase, to place India on a sustained 7 per cent plus growth path.