Macroeconomic threats to Indian economy

    Indian economy is going through a turbulent period with key indicators hinting at a prolonged slowdown. The coronavirus pandemic has weakened all sectors of the Indian economy since April and a recovery seems unlikely this year. From contraction in growth to rising inflation and unemployment, challenges are aplenty. The sharply surging coronavirus cases make the case for recovery worse. India’s GDP growth is expected to remain in negative zone for the entire year and projections for June quarter signal how adversely Covid-19 has disrupted the livelihood, particularly of the poor. recent SBI Ecowrap report said the national GDP may contract by 16.5 per cent in the first quarter of the current fiscal. The report also mentioned that India’s economic recovery could take much longer than expected. The annual GDP is forecast to sink over 5.1 per cent. This will mark the weakest GDP growth rate in over four decades.

 five major challenges that Macroeconomy threats are 

 Weak demand

  Stagnated demand seems to be the biggest challenge for the economy at the moment. Demand for key goods and commodities like fuel, food, consumer goods and electricity has fallen over the last few months. While India’s demand woes began in 2019, the coronavirus pandemic only worsened the scenario. India’s consumer demand is declining due to drop in household incomes in the wake of major job losses in the wake of a raging pandemic that has forced closures of factories and businesses.

 Unemployment 

 The latest unemployment figures, released by the Centre for Monitoring Indian Economy (CMIE), are another evidence of economic weakness. The CMIE data show that nearly five million or 50 lakh salaried jobs were lost in July, taking the total number of layoffs in the formal sector to over 1.8 crore. 

 Lack of fiscal stimulus 

 Many noted economists have made it clear that India needs another round of fiscal stimulus to support growth. While the government, at the start of the pandemic, announced a fiscal stimulus package of nearly Rs 21 lakh crore, most of it was focused on bank credit for businesses. Experts said the government’s inability to provide direct fiscal stimulus, like many other countries, is due to India’s stretched fiscal deficit. The fiscal deficit has already hit a record $88.5 billion over April to June, which is over 83 per cent of the target for the current financial year. While some businesses in the informal sector have reopened post-lockdown relaxations, they are struggling to survive due to lack of demand, and constrained by the lack of available workforce. Experts say most informal businesses depend on the cash flowing from the formal economy i.e. salaried jobs. The economic situation could worsen further if more salaried jobs are lost. Lower tax collections and front-loaded spending are some of the reasons pushing the fiscal deficit higher. Finance Minister Nirmala Sitharaman has, however, promised to take some steps for businesses that have been hurt most — travel, tourism, hospitality — once they are allowed to completely reopen

. Rising inflation

  Rising inflation has complicated the economic situation further. In July, retail inflation rose to 6.93 per cent, way above the RBI’s medium-term target of 4 per cent. Economists say it is an unusual situation where prices of food items like vegetables, pulses, meat and fish are on the rise despite weak demand.

The July inflation figure at 6.93 per cent is worrisome when compared to the 3.15 per cent on the consumer price index (CPI) in July 2019. This reduces the possibility of a rate cut by the RBI in near future. It also means that demand for loans could remain lower due to elevated interest rates. Low demand for loans means lesser new business activities, and fewer new employment opportunities.

Rising coronavirus cases

There is an emerging view that it will not be possible for India to tackle the economic crisis unless it manages to bring the alarming Covid-19 situation under control

In the present scenario, key sectors like hospitality and tourism continue to remain out of action. A holistic economic recovery will only be possible when India manages to bring down the number of coronavirus infections

Expert view

Analysts from Morgan Stanley expect India’s economy to witness a strong recovery after the body blow dealt by the COVID-19 crisis, as a pickup in investment along with underlying structural reforms is likely to lead to a virtuous cycle of “high productive growth”.

Consumption, which so far has been lagging, to pick up in a broad-based manner from Q1 FY22 as vaccination rates cover the entire eligible population. Improving end demand (consumption and exports) pushes capacity utilization rates higher, alongside a conducive policy environment which should pick from yr 2022 with projected annual growth by 7.2%

The RBI is mandated to maintain CPI inflation in a band of 2-6 per cent with the medium-term target being set at 4 per cent.

We thus expect CPI inflation to remain steady at 5 per cent in 2022. Risks are to the upside, driven by a persistent cost-push increase related to the supply side and/or a faster-than-expected increase in demand which creates risks of generalized price pressures.

Repo Rate 

RBI will raise the reverse repo rate (3.35 per cent)

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