Need to mitigate pandemic’s impact on economy was the main theme of MPC meet

The resurgence of Covid-19 infections and the need to mitigate the pandemic’s impact on the economy was the centerpiece of discussions of the six-member monetary policy committee (MPC) at its meeting held between April 5 and 7.

Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi, observed that the pace of recovery of output needed to offset the negative impact of the Covid-19 shock to the economy in terms of growth in income, and employment will be substantial and sustained over many years.

“As the rise of Covid infections and resulting local restrictions on the movement of people in March shows, controlling the spread of infections in essential for sustained economic recovery.

“Going forward, success of vaccinations, universal adoption of preventive measures to severely limit the chances of transmission of the virus and investment in health services to assure access to health care will define the course of economic recovery,” he said.

Growth uncertainty

Ashima Goyal, Professor, Indira Gandhi Institute of Development Research, Mumbai, underscored that growth uncertainty has increased with the second wave in Covid-19 in some states.

“The effect on growth could be marginal if complete lockdowns and bans on interstate movement are avoided. The nature of the virus and its ability to mutate imply too much unlocking can create a surge. Large gatherings are especially dangerous,” she said.

Goyal noted that even the above 10 per cent growth most analysts still expect for 2021-22, however, will barely take us to the level we had reached in 2019.

“We have to also make up for lost time; alleviate widespread job loss and income stress. Expected growth is high because of the base effect and does not imply sustained growth at potential. Only when we reach the latter will true recovery have taken place,” she said.

Jayanth R Varma, Professor, Indian Institute of Management, Ahmedabad, said the economic recovery after the pandemic shock of 2020 remains uneven and incomplete, and the renewed jump in infections in certain parts of the country has increased the downside risk to the growth momentum.

“On the other hand, inflation rates have been consistently well above the mid point of the target zone and is forecast to remain elevated for some time. This is a difficult situation, but I believe that the balance of risk and reward is in favour of monetary accommodation,” he added.

Mridul K Saggar, Executive Director, RBI, flagged the sudden resurgence of the Covid-19 infections; emergence of incipient signs that the recovery is beginning to lose some steam; and return of inflation after a short-lived decline to the target; among others.

“The economic recovery can come under risk if this new wave of infections is not flattened soon. This is especially so as monetary and fiscal policies have already used most of their space to considerably limit loss of economic capital, though expansion of policy toolkits can still afford additional comfort.

“While the countrywide dispensation is still quite supportive of production activity, this can change if the virus spread, hitherto contained to few States, might transmit across country,” cautioned Saggar.

MD Patra, Deputy Governor, RBI, said risks to the recovery have become accentuated since the MPC’s February meeting – new waves of infections and the inexorably slow pace of vaccinations; moderation in several high frequency sentiment indicators; and global risks and spillovers.

“Monetary policy has to remain supportive of the economy until the recovery is more sure footed and its sustainability assured...I would continue to look through the recent elevation in inflation and remain focused on reviving the economy on a path of strong and sustainable growth,” he said.

A big challenge

Shaktikanta Das, Governor, emphasised that rapidly rising cases of Covid is the single biggest challenge to ongoing recovery in the Indian economy. Learnings of last one year should, however, help the country in managing the crisis as it unfolds.

Das observed that the need of the hour is to effectively secure the economic recovery underway so that it becomes broad-based and durable.

“The renewed jump in infections in several parts of the country and the associated localised and regional lockdowns add uncertainty to the growth outlook.

“In such an environment, monetary policy should remain accommodative to support, nurture and consolidate the recovery. We need to continue to sustain the impulses of growth in the new financial year 2021-22,” he said.