A meeting of the MPC held on the 7th of April had decided to keep the repo rate unchanged at 4percent continuing to accommodate the stance to support economic recovery as well as the government’s borrowing plan. However, the second wave seized these plans affecting the GDP and inflation.
RBI on the upfront
2 months ago, the RBI was upbeat on a faster economic recovery and easing of inflationary pressure. It assured the economy would strengthen as the urban demand and demand for contact-intensive services would be covered by the substantial fall in COVID-19 cases and the spread of vaccination. Similarly, with a larger-than-anticipated deflation in vegetable prices in December, the Central Bank was banking on a lower food inflation trajectory to shape the near-term inflation outlook. The RBI projected a real GDP of 26.2 percent to 8.3 percent in the first half (April-September) of 2021-22. The third quarter (Oct-Dec) GDP was projected at 6 percent with the entire fiscal year at 10.5 percent.
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The Impact of Second Wave
The resurgence swept the economy brutally, thrashing India‘s recovery mid-way. Already crossing infection figures of 1 lakh cases as compared to the earlier peak of 98,000 in mid-September last year. There are over half a dozen states like Maharashtra, Karnataka, and Punjab, which are bringing the bulk of the cases. The services sector is a major contributor to the country’s GDP, accounting for 55 percent of the gross value added. However, the second wave and the partial lockdown in the country’s financial capital Mumbai dashed the hopes of economic reset. Sectors like hotels, tours, and tourism, malls, theatres, restaurants are forced to hibernate. The supply-side issues post the second wave will also impact the core inflation which has been convoluted in the past few months. The sudden rise in crude prices is also contributing to inflationary pressure.
TPT Policy Advocacy and Recommendations
- Grim trepidations have been cited by distinguished economists after the second wave took the country by terror. The Indian government needs to delicately balance the economy and the social life being considerate of unforeseen times. When public health sneezes, the country’s economy catches a cold. The second wave highlights the urgent need for health and economic policy action to cushion its consequences, protect vulnerable populations, and strengthen countries’ capacities to prevent and deal with similar events in the future. The transparency of all government financial commitments, debt-like instruments, and investments is a key step in creating an attractive investment climate and could make substantial progress this year.
- After the 1990s Asian Financial Crisis; Southeast Asian countries prioritized health and universal health coverage. So did the UK after the Second World War. Indian government should take learning and make greater investments in health care as it is the trump card for economic development. It should choose the same path to boost the trajectory of its economic growth.