By Sachchidanand Shukla
If the year 2020 was truly a head-spinning year, a year like no other, 2021 will be an exhilarating albeit bumpy one. In 2021, the sheer scale and efficacy of inoculating 7 billion people with billions of doses of vaccine will be truly unprecedented. Why India alone plans to vaccinate 30 crore people by mid- 2021. We have ushered in the new year with hope, piggybacking vaccines and mass vaccination drives but must be aware of key macro monitorables:
The Growth YoY: The sheer pace of growth will surprise in certain quarters amplified by the base effect and YoY comparisons. And yet, recovery will be uneven, incomplete and occur in fits and starts. In fact, the level of output in FY22 may still be just about equal to or lower than in FY20. Importantly, the V-shaped recovery in the headline GDP number will hide more than it reveals as it is just an average – sectors such as aviation, hotels, CVs, real estate and capital goods would see sharp fall in GDP in FY21. The extent of the recovery in these sectors in FY22 as compared to FY20 levels is likely to lag the recovery. Policy measures must ensure targeted support to these sectors in order to prevent the loss of productive capacity and avoid labour market shocks and debt overhangs.
Greener’ Growth: The globetrotting coronavirus has demonstrated how vulnerable we all are to ecological shocks. Thus, mitigating climate risks will come to the fore for governments, companies and individuals. This may manifest in changes in public spending where there is some alignment of the need to invest and stimulus programmes with environmental objectives
Adoption of ESG framework will get fresh legs as it is being driven by changes in consumer preferences & entrepreneurs. So far, investors focused more on ‘’G’’ ie Governance but going forward due to the pandemic “E” and S will start to matter more.
The fiscal impulse to growth in FY22: Can or will the government support growth by higher fiscal impulse? With higher nominal growth rate of 13-15% YoY, the fiscal deficit as a percentage of GDP and govt. spending to GDP ratio is likely to shrink. This implies prima facie that the fiscal support to growth is expected to diminish in FY22 vs FY21 levels unless it is made up for by higher non tax revenue generation. The govt. must make up for this by announcing growth supporting policy measures and improving the quality of spending in their FY22 budgets.
Credit recovery and the finance constraint to growth: India cannot grow at 6-7% growth rate on a sustained basis with credit growth in low single-digits. While bank credit growth has eased to ~6%, NBFC credit growth has also fallen to single digits. The private sector banks and NBFCs (which have accounted for 75-80% of incremental credit in the last three years) are extremely cautious to grow their books, given the possibility of a spike in bad loans. The policymakers and the RBI will have to address resolution of bad assets with targeted measures that involve a quick clean-up so revive the credit cycle.
Asset price inflation & the unwinding of policy excesses: Asset markets awash in liquidity and in anticipation of V-shaped recoveries have zoomed. Commodity prices have moved up sharply too and will likely manifest in higher input costs but will they hurt margins? We believe, productivity gains and return of pricing power should keep companies in good stead and help neutralise some of the commodity cost pressures. However, for India’s economy this may manifest in added pressures through the twin deficits.
Note, the sharp recovery has been supported by swift and unprecedented fiscal, monetary and regulatory responses by policymakers. The IMF estimates the size of the fiscal response by authorities across the globe at US$12trillion – equivalent to nearly 10% of global GDP. Besides, total assets of the Fed, ECB, BOJ and PBOC have risen by over 35% or US$7trillion in 2020 as they pumped in liquidity to shore up economic activity.
However, policymakers will have to start evaluating exit strategies from these policy excesses and regulatory easing as confidence in the economic recovery builds up in the post vaccination world (likely in H2 2021). This could cause some accidents via the currencies and asset markets, particularly in those EMs which are susceptible to capital withdrawals. Effective communication and signals of a gradual orderly unwinding from policymakers would thus be key to prevent stress in the financial markets.
Shadow of State and local body elections: Four states and one Union Territory – West Bengal, Tamil Nadu, Kerala, Assam and Puducherry – would be going in for elections in May 2021, the results of these could pave the way for electoral shenanigans for UP elections to be held in early 2022. The West Bengal elections, in particular, would be watched closely with opinion polls predicting a very close contest between the TMC and BJP. Apart from the state elections, local body elections are also increasingly becoming important in India as underscored by the recent elections in Hyderabad, Kerala and J&K. Local body polls in Punjab and Madhya Pradesh are due to be held in February and would be closely watched.
(Sachchidanand Shukla is Group Chief Economist at M&M. Views expressed are the author’s own.)