Rajeev Upadhyay

Rising Inflation Poses Risk to the Recovery in the Indian Economy

It must be noted by the central government that if the inflation continues to elevate in coming months and breaches the upper band of the targeted consumer inflation, it will hurt every sector of the economy and the demand. The fall in the demand in the economy will affect revenues of most of the businesses particularly the micro, small and medium enterprises (MSMEs) adversely. This fall in revenues will increase the risk of survival for most of these MSMEs and might lead to increased numbers of insolvencies and bankruptcies in the economy. Rise in the insolvencies and bankruptcies will worsen the non-performing assets (NPA) conditions in the economy gravitating and complicating the banking and financial sector crisis further.

In such a peculiar situation only the central government along with the state governments can provide relief to the economy else increasing inflation will extend the economic recovery period to create more problems for the economy. The governments should at this point of time put aside their greed to collect more revenues from the petroleum products to finance the increasing deficit and put a dynamic mechanism to check the rising prices of the petroleum products. Rather they should focus on diversifying and collecting more revenues from other sectors of the economy by increasing the economic activities as further increase in the inflation would be a constraint for the economy as a whole.

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Time to Change the Monetary Policy Stance

The IMF has raised the alarm about the high leverage positions in the economies across the globe and the loose monetary policies being pursued by the central banks to increase the economic activities in their respective economies. The IMF is worried that the loose monetary policies and very high leverage in economies may result in instability due to increased financial vulnerability. Even the chances of financial crises are increasing due to the ballooning asset prices and credit boom across the economies.

Loose monetary policies and high leverage play a very important role in increasing economic activities during such crises. Many firms in India due to the easy availability of credit and the moratorium provided to the borrowers as well as the suspension of IBC have been able to survive and the economic activities are back to pre-COVID period. But other economic factors indicate that RBI has to change the direction of the monetary policy.

Farm Sector Distress is Symptom not the Cause

Denial is not a solution to any problem as the problem never ceases to exist but is the most convenient tool for the responsible to avoid any question, scrutiny or criticism. Every year thousands of farmers across India suicide due to farm sector distress. However it is difficult to ascertain and segregate how many of them commit suicide due to farm sector distress and other reasons. But the administration in the governments (central and states) have over time developed a peculiar habit of denying and not accepting this fact straightforwardly. In many states, the government agencies fail to even compile the data for the same perhaps to avoid the onus from them. However, even if the state governments don't compile the data regarding the farmers' suicide or the central government fails to procure the same from the states, there exist the problem of farm sector distress and farmers' suicide in India and is duly acknowledged.

Reservation is considered to be a positive discrimination to undo the social injustice and inequalities metted out over centuries but people have varied views about the same and India is not an exception to it. Over time people from all spectra of life willingly or unwillingly have accepted and come to the term with the reservation on the basis of caste in the government jobs and education in India. But of late people belonging to the Unreserved (UR) category and creamy layer of OBC (Other Backward Caste) have been becoming very vocal against the caste based reservations as it makes difficult for them to get government jobs and admission in government education institutions (Kumar, Pratap, & Aggarwal, 2019). Considering these disadvantages, there was demand for reservation on the basis of income which now has been accommodated through a new legislation by the Indian Parliament for the Economically Weaker Sections (EWS) of society (MSJE, 2020).

Budget 2021-22

Post lockdown, the way Indian economy has shown resilience with continued ‘V’ shaped recovery is very optimistic. It indicates that the India economy even after the pandemic shock is on a very strong footing. This optimism in the environment has also been echoed by the stock market. However, it is very important that this optimism in the economy gets strong fiscal support with proper policy response as well as anchoring from the government in the present budget for the fiscal year 2021-22.

Considering the agriculture profile of India and the small land holding pattern, sustainable growth in agriculture is a mammoth challenge both for the farmers and the governments. This not only requires policy responses to better connect the agriculture sector to markets but private as well as public investments both to create capacities. To achieve this, there is a need for coordinated agricultural development efforts and proper use of technologies to collect and disseminate information. In this process, the involvement of the corporate sector at different levels can be vital. As per Company Act 2013, corporates are required to spend a part of their earnings towards the Corporate Social Responsibility (CSR). Many corporates are already spending a large portion of their CSR corpus in the agriculture sector. The strategic use of this CSR corpus can be very helpful in erecting and maintaining agriculture infrastructure and avoid overlap of different government schemes.

Increasing Cover of Lockdown to Affect Economy Adversely

The following graphs clearly indicate that there is another wave of coronavirus in India. The battle which India had almost won by flattening the corona curve is now again at our doors. Across states and cities citizens and the state governments as well as the administrations are not serious enough about it. Now across the country the most effective tool and weapon against the COVID19 outbreak is the social distancing but it seems to be a thing of past for the most. Most of the people are now completely relying COVID19 Vaccine but it is too early. Until and unless more than half of the population is vaccinated, complete dependence on vaccine would be risky proportion.

Indian Economy on the Path of Expansion

The blanket lockdown of the whole India by the Government of India in response to the COVID19 pandemic has given a never seen before shock to the Indian economy. However, different economic indicators started indicating the revival of economic activities post gradual relaxations granted in the lockdown since May 2020 by different states. However for more than two quarters, things remained very difficult for the economy. Considering the fall in the aggregated demand in the economy, the government was forced to suspend the Insolvency and Bankruptcy Code (IBC) so that individuals and businesses could get enough time and space to adjust in the post pandemic recession and the events of defaults could be avoided. This single decision has been very helpful for the whole banking sector. Although it has adversely impacted the revenues of the banking sector but has been very helpful in dealing with the non-performing assets (NPA).

Inflation Spikes in February

Inflation is rising. Both the retail inflation as well as the core inflation has spiked to 5.03% and 5.7 in the month of February 2020 in the economy in comparison to the month of January while Index for Industrial Production (IIP) has contracted 1.6% during the same period. This spike in the inflation can partly be attributed to the small base but it is largely due to cost push pressures in the economy. Most importantly the inflation is not expected to moderate significantly besides the base effect until and unless the government decides to cut the taxes on fuel.

IDBI out of PCA Framework

In its recent notification, the Reserve Bank of India (RBI) has taken IDBI bank out of the Prompt Corrective Action (PCA) framework. This is good news for the banking sector in general. It clearly means that the financial position of IDBI bank has improved enough to be taken out of the PCA framework. A bank is put under the PCA framework of RBI on the basis of three parameters namely capital to risk weighted assets ratio (CRAR), net non-performing assets (NPA) and Return on Assets (RoA). When these key ratios fall below the trigger points As per the RBI press release, for the quarter ending on 31st December 2020, the bank has been found to be not in breach of the PCA parameters on regulatory capital, net NPA and leverage ratio.