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Expect FY22 GDP growth at 9% with a downward bias; speed and scale of vaccination to shape recovery: Madhavi Arora of Emkay

Monetary policy support has been more proactive and pre-emptive since the first wave of Covid. There has been the deployment of unconventional monetary policy measures that distribute liquidity among all stakeholders and expanding the financial safety net, says Arora.

June 26, 2021 / 07:54 AM IST

Madhavi Arora, lead economist at Emkay Global Financial Services, feels cyclically demand rebound may improve dynamics in H2FY22 as normalisation kicks in.

“Stepping up vaccination drive remains the most viable and cheapest policy path to normalisation,” she tells Moneycontrol's Sunil Shankar Matkar in an interview. Edited excerpts:

Do you think the expected recovery, post easing of lockdown, will still help India report double-digit growth in FY22, though there is a lockdown impact on Q1FY22?

India's macro narrative has changed swiftly from being a linear V-shaped recovery in FY22 to a story of a lost quarter. Amid states’ evolving mobility guidelines and increasing geographical spread of the virus, our bottom-up projection suggests that, for every month of localised lockdowns, in May, the output loss would be around Rs 1.25 lakh crore.

The fall in secondary and tertiary sector capacity utilisation varies between 10 per cent and 40 per cent among states. This implies roughly 1 percentage point loss in output per month during the first phase of COVID, much lower than the estimated loss of more than 5 percent point in output growth per month during phase 1 of lockdown. Clearly, factors such as better- adapted firms and policy responses, stable financial conditions, vaccine drive, pent-up demand release and robust global growth spillovers create growth buffers.


Admittedly, as per the current assessment, the COVID toll during the second phase of COVID is mainly in terms of the hit to domestic demand and less from the supply side, be it primary, secondary or tertiary sectors. Agriculture and contactless services are holding up, while industrial production and exports have surged amidst pandemic protocols.

Assuming restrictions ease further by Q2FY22, and a larger proportion of the population are vaccinated, some pent-up demand could push GDP growth back up in H2FY22.

We see FY22 GDP growth at 9 percent, with a downward bias. We admit the situation is still in a flux, but as per the current dynamics, we expect Q1FY22 annualised growth to be around 16.5 percent versus 22 percent-plus estimated before the second wave. Going forward, the speed and scale of vaccination will shape the path of recovery.

What are those key known and unknown risks that India can face in the coming quarters? How can these risks be tackled?

Cyclically, demand rebound may improve dynamics in H2FY22 as normalisation kicks in. Given the strong positive externalities, stepping up the vaccination drive remains the most viable and cheapest policy path to economic normalisation.

However, the vaccination drive is still skewed state-wise, and needs a ramp-up. Our calculation is that roughly 70 percent of the population could be vaccinated by March 2022, assuming ramped-up supply in July, and, further, in November.

Vaccine administration efficiencies will matter as well. Any slower churning in the expected monthly rate of administration (around 5.5 million per month from July and 7 million per month from November) could potentially increase this timeline and drag demand-side caution. Besides, one still isn’t clear on the third wave and the policy preparedness for the same.

We note that, at this time, the vaccination drive is skewed, state-wise. While centralisation of vaccination should help, prioritisation of delivery of vaccines, appropriate supply to states as per population/population density/urban/rural ratio/wastage ratio etc., would need to be seen to improve distribution and administration efficiencies.

Our weighted measure of optimal vaccine distribution depicts that states such as UP, Delhi and Tamil Nadu have a much lower current share than they need, while Gujarat, Rajasthan and Maharashtra have received relatively more vaccines so far.

Secondly, we reckon the nascent and patchy K-shaped growth recovery, post the first phase of COVID, came with a potentially scarring and divided labour market amid sub-optimal effective fiscal policy stimulus.

The recovery ahead (just as last year’s) may also be led by capital and profits and not by improving labour markets and wages. Thus, it could have medium-term demand implication, if the policy focus is not appropriate.

The RBI and the government have been doing their best to bring the economy back on track amid COVID-19. What more measures can the RBI and the government take to further boost the economy?

Monetary policy support has been more proactive and pre-emptive since the first phase of COVID. There has been the deployment of unconventional monetary policy measures that distribute liquidity among all stakeholders and expand the financial safety net.

In the near term, the state-wise response should ideally focus on managing labour market dislocations and ensuring tailor-made income support for the segments that were hit by COVID. We estimate that amidst various push and pull, there is a likelihood of fiscal slippage to the tune of around 0.5 percent from the initially budgeted 6.8 percent.

Despite the slippage, the effective fiscal impulse will still be negative in FY22. Given the limited efficacy of the current monetary easing, continued countercyclical fiscal policy support—and avoiding a premature consolidation—remains crucial.

Given the improving economic data points in the US, along with the easing COVID pressure amid large-scale vaccination, do you think the Federal Reserve can hint at a slowdown in bond purchase plan in the second half of 2021?

The June meeting already saw a hawkish turn of FAIT (flexible average inflation targeting), with the median dot indicating two rate hikes in 2023. Less surprising, but hawkish nonetheless, Chair Jerome Powell indicated they have begun talking about when tapering will begin.

While he indicated they are 'a ways away' from the 'substantial further progress' goals needed to actually start tapering, he also indicated that economic progress is being made and the tapering discussion will continue in 'upcoming meetings'.

He underscored that any adjustment would be communicated 'well in advance'. But he didn't do much to expand on the definitions of 'substantial further progress' or 'well in advance'.

We still see tapering not starting before Q1CY22. The most notable changes were related to public health developments, with Powell acknowledging the pace of vaccination changing the growth prospects dramatically.

More broadly, it appears that faster progress towards reopening and higher inflation surprises revealed some hawks in the FOMC (Federal Open Market Committee), but we suspect that leadership is predominantly anchored at zero or one hike in 2023. We continue to look for tapering starting in Q1CY22 and for a possible lift-off only in late 2023.

Do you think rising inflation in the US can be a risk?

The US inflation is 5 percent at this point. It has been surging over the past couple of months, partly led by a very favourable base effect, supply-side constraints, of both goods and services, and a mild demand improvement.

The May US CPI inflation beat expectations again with another solid monthly gains, leading to headline and core YoY growth climbing a further 5 percent and 3.8 percent (consensus 3.4 percent), respectively -- and the highest since 2008 and 1992, respectively.

However, with supply-chain disruptions impacting the auto sector and relative normalisation in the travel sector, it continues to look like temporary reopening-sensitive factors are driving inflation higher.

The surge in used-vehicle prices reflects shortage of chips amid increased demand. Other reopening-sensitive components like airfares, lodging, food-away-from home etc. continue to drive core inflation. All these components seem to have contributed almost 50 percent+ to CPI MoM gains in May (albeit lower than the 60 percent+ contribution in April, implying some demand improvement).

We reckon the above readings are possible for short periods of time. But we maintain that the underlying inflation trend will firm only modestly as recovery continues. We anticipate moderation in YoY inflation in Q3CY21. Inflation volatility does not imply inflation sustainability. We don’t see the US fiscal package causing runaway inflation. The fiscal package is not an immediate shot to the economy but will be disseminated over the years.

We maintain that the core ingredients for sustained inflation are missing and the 'low-inflation' scenario is here to stay. Our views are shaped largely by the experience of recent decades that featured modest and steady inflation. COVID-led slack could instead curtail global price pressures for long.

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Sunil Shankar Matkar
first published: Jun 26, 2021 07:54 am
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