Economic Recovery Takes Wings But Not Out Of The Woods Yet

Cheered on by the decline in Covid-19 cases and reopening of economy, GDP is expected to rise 1.3 per cent in October-December, while it is likely to contract 6.8 per cent in financial year 2020-21

Economic Recovery Takes Wings But Not Out Of The Woods Yet

Banks have led lending to small businesses but not until the government took credit risk away from them.

On Friday, the Union government is scheduled to release third quarter gross domestic product (GDP) growth numbers. The economy is expected to have grown by 0.5 per cent after two consecutive quarters of contraction.

Cheered on by the decline in Covid-19 cases and reopening of the economy, GDP is expected to rise 1.3 per cent in October-December, while it is likely to contract 6.8 per cent in financial year 2020-21.

Hit by the Covid-19 pandemic and the nationwide lockdown imposed by the government in late March last year to control the spread of infections, India's GDP contracted 23.9 per cent in April-June and 7.5 per cent in July-September quarter.

Retail inflation, measured Consumer Price Index (CPI), eased to 4.06 per cent in January 2021. Separately, the factory output, measured in terms of Index of Industrial Production (IIP), grew 1.0 per cent in November.

Electricity consumption, commercial vehicle sales, freight, manufacturing output, and imports have all reached pre-pandemic levels. While these might have cheered the economy, major steps must be taken to fuel economy growth going forward.

Both the government and the Reserve Bank of India (RBI) have provided a helping hand for the recovery to gain traction. Fiscal measures such as production linked incentive (PLI) schemes, larger capital outlay for FY22, credit guarantee schemes, among others, have had begun to have an impact as is witnessed from higher credit offtake by small businesses and increase in investments. Real interest rates are low and the RBI has promised to maintain surplus liquidity.

But, there has been a resurface of fresh infections of Covid-19 in some states country recently. This has fuelled fears of a second wave and the likelihood of lockdowns being imposed again. Already, several districts across states have been put under lockdown by state administrations. A surge in cases in big cities has been worrying state governments. While lockdowns may not be stringent as in last year, they do limit mobility of goods and people.

Businesses hurt by the pandemic have been able to access funds due to the RBI's liquidity infusion and government steps to mitigate credit risk. Banks have been at the forefront of lending to small businesses but not until the government took the credit risk away from them. But bank balance sheets are still encumbered with legacy non-performing assets (NPAs). Public sector banks, which account for more than half the system's credit, continue to see capital flowing towards provisions rather than growth.