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ECONOMY & BANKING AMID COVID

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ECONOMY & BANKING AMID COVID
By: Dr. Sanjiv Agarwal
June 7, 2021
All Articles by: Dr. Sanjiv Agarwal       View Profile
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There continues to be a strong belief that our economy may not contract as deeply and largely as was the case in the first wave but it is certainly linked to our health policy, infra structure and recovery from Covid.

Unlike first wave of Covid in 2020, when entire economy was affected including both, goods and services, this time in second wave, services are more effected and goods continue to roll on in view of selective restrictions on construction and manufacturing sector. However, demand is low due to poor mobility and lock-down.

The same view is opined by Reserve Bank of India but however, with a caution that uncertainty may act as a short term deterrent with demand pick-up to be crucial for recovery. Growth depends upon how fast we can curb the second wave of Covid-19. At this juncture, a durable revival in private consumption and investment demand is critical for a self- sustaining GDP growth. In fact, RBI’s latest annual report states that ‘compared to financial crisis, a health crises can be more pervasive, persistent and debilitating in its impact on the real economy and  letting down the guard is perilous. It is best to prepare for future waves’. Policy makers need to take this as a hint on what India requires in present times.

RBI has kept its stance unchanged on rates in its recent monetary policy review on 4th June, 2021. It also announced additional bond purchases of ₹ 1.20 lakh crore to support economic recovery which is at risk owing to Covid 2nd wave infections. It has not altered repo rate primary lending @ 4% and reverse repo rate & borrowing rate @ 3.35%. It also continue its policy to be accommodative with growth focus. RBI has also opened up liquidity of additional ₹ 15000 crore for certain Covid hit sector like hotels, restaurants, tourism etc. Banks can also provide fresh support to such sectors. As a incentive, banks will be allowed to park surplus liquidity upto the size of loan book in this scheme with RBI under reverse repo window @ 25bps lower than the repo rate.

OECD, Organization for Economic Cooperation and Development, which had earlier predicted growth @ 12.6 % for India has now revised it to 9.9%. This only indicates that recovery is not that easy and it should be taken seriously amid Covid pandemic. The process of relaxations in lock-down or curfew has just begun from 1.6.2021 which will be in gradual manner only. This will determine the pace of reversal as well as capacity and willingness of customers to consume and push the demand. Rise in spends and faster vaccination, both will aid the economic recovery.

Moody’s Investors Services suggests that Indian economy may rebound in current fiscal with a growth of 9.3% with Covid second wave increasing risks to Indian credit profile and ratings . Presently moody’s rating is ‘Baa3’.

Accordingly to NSO data, the growth in GDP in financial year 2020-21 is estimated at (-) 7.3% as compared to 4% in preceding year 2019-20.

If the second wave of Covid is confined to Q1 of current year, it may be the most optimistic situation but we will have to wait and see. Than what about so called third wave ? Will it be ? Will it not be ? We will have to watch. The first two waves pushed India back on defense in social and fiscal terms with lot of destruction. Economic recovery can not be taken for granted and future Covid waves can not be ruled out. Some stimulus is required in the economy to boost demand. Also vaccination drive will have to be simultaneously pushed.

The largest and biggest impact on economy is expected to be in May – June, 2021 as most parts of India are looking forward for unlock process being backed by fast recoveries. Further, though slow, the vaccination process is also widening with all adults now under its ambit and more options of vaccines being made available. This time crisis has been more on human wealth than the economy. Eventually, there is going to be light at the end of long tunnel. 

In today’s context and backdrop of Covid, India also needs to redefine its priority sector so as to include education and health care along with medical insurance.

 

By: Dr. Sanjiv Agarwal - June 7, 2021

 

 

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