15/11/2021 - Indian economy

KEY POINTS

·        In India’s battle with Covid-19, recovery was largely under-predicted and financial sector distress over-predicted.

·        The inference from better-than-expected outcomes is that supply-side reforms have reached a threshold that allows higher growth and low real rates aligned with surplus liquidity to raise demand and output.

·        Among these constraints are commodity price shocks and other supply-side bottlenecks, financial inadequacies and macroeconomic volatility.

·        More than fundamental reforms, sustaining Indian growth requires continued fiscal supply-side action that reduces costs of doing business and therefore inflation.

·        This allows monetary policy to keep real interests at a level that stimulates demand.

·        Such monetary-fiscal coordination works best in Indian conditions of migration to higher productivity employment amid supply bottlenecks.

·        Covid-19 induced supply chain diversification, together with the government’s PLI scheme and other incentives for firms may help India create jobs in labour intensive manufacturing that it has so far missed.

·        Monetary transmission to output is effective, with the share of retail loans growing. Housing and consumer durable loans are reviving as well as investment in specific sectors.

·        The sheer size and diversity of a $2 trillion economy creates much more depth and resilience and the ability to absorb shocks, with the appropriate countercyclical policy.

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