The Indian economy grew by 8.4% in Q2, but a complete rebound, it appears, has never been closer and never further away. At least three factors, including the new Covid variant Omicron, a not-so-transitory inflation and global supply chain issues, are threatening to dangle the economy back on a fishing hook. As SBI Research estimates, the Covid-19 pandemic hacked `11.4 lakh crore off real GDP in the first half of last fiscal. We are better off now, with real gains of `8.2 lakh crore, but we still need to recoup the remaining `3.2 lakh crore lost output to be back at the pre-pandemic spot. This, SBI Research believes, will take one more quarter. But regardless of how much forecasters bleat about regaining the pre-pandemic levels, that’s an unconvincing benchmark given that we were coursing through one of the harshest slowdowns then. Thus, India should set itself the sustainable pre-slowdown 7–8% growth as the ideal target.
Though the Q2 headline growth rate is appealing, granular data is somewhat disappointing. For, the industries sector is still operating below potential and recovery was largely driven by investments than private consumption, which remained below pre-pandemic levels. The demand side hasn’t recovered fully and with a weak household sector, consumption may continue to lag. Given the uneven nominal wage growth and chances of continuing high inflation, which is forcing producers to jack up prices (e.g., the auto sector), chances are that the negative impact on consumption will likely persist and the negative output gap may sustain longer than anticipated. Moreover, the services sector operating at 80% of pre-pandemic levels may suffer if Omicron infections worsen.
As they say, caution is a logical response to uncertainty and so the RBI may keep rate hikes on hold next week. This will be a marked departure from the widely expected reverse repo rate hikes in December to narrow the rate corridor, notwithstanding the inflationary pressures. The government, which incidentally is blessed with robust direct and indirect tax collections, too should stand ready with counter-crisis measures.