Expert Opinion

Published: Dec 29, 2021
Updated: Dec 29, 2021

Girding up for post-Covid challenges

Global GDP will be back at pre-pandemic levels by the end of 2021 after a strong recovery. However, as the economic expansion continued into 2021, economic growth slowed in the first half of the year, partly due to supply-chain disruptions caused by the rapid recovery and partly due to rising Covid-19 Delta variant infections slowing consumer and business activity. In addition, the real GDP declined in many countries with low vaccination rates and/or low natural immunity, particularly in India and Vietnam in the second and third quarters respectively.

The cost of commodities such as energy and food has been on the rise recently. Moreover, due to the pandemic-related disruptions and labour shortages, e.g., trucking and shipping container shortages, there will likely be prolonged global inflationary pressures.

Furthermore, a delay in the switch from primary goods consumption to more balanced consumer spending, including in-person services, will also cause overall prices to remain high. Due to the escalating policy rate increases, especially among emerging markets, and accelerated tapering of quantitative easing among advanced economies, businesses should expect higher interest rates sooner rather than later.

Overall, the global economy continues to grow strongly despite a variety of headwinds, primarily due to the generally accommodative monetary and fiscal policy stances and pent-up consumer demand and business investment. As a result, a growth rate of 5.1 per cent is forecast for global GDP in 2021, rebounding from a contraction of 3.3 per cent in 2020. In addition, most regions will likely experience above-average growth next year, with global GDP projected to expand by 3.9 per cent.

From the high growth rates seen in the immediate aftermath of the pandemic recession, the global economy is likely to moderate to an average annual rate of around 2.6 per cent beyond 2023. In the long run, the global pandemic may have left a permanent scar on global growth, but it is expected to return to levels closer to, but not higher than, those before the pandemic. Over the next decade, factors driving global growth, including a labour surplus and a rapid increase in capital stockto-worker ratios, are expected to wane considerably. In large economies such as the US, these slowing factors will only be partially offset by an increase in the contribution of qualitative growth sources, including accelerated digital transformations and productivity enhancements, as well as additional long-term investments in physical and social infrastructure. India should continue to tailor its policy mix to local economic and pandemic conditions, aimed at achieving maximum sustainable employment while preserving its credibility.

UPLIFT WORST-HIT

India’s fiscal policy imperatives will vary; the priority remains healthcare expenditure. Further, lifelines and transfers will have to become increasingly targeted to the worst-hit. They will need to offer retraining and assistance for reallocation as the pandemic continues and fiscal space becomes limited in some countries. The focus should be placed on securing the recovery and investing in long-term structural goals where health metrics permit. Initiatives must be embedded in medium-term frameworks with credible revenue and expenditure measures to ensure debt sustainability.

While the RBI can generally ride out transitory inflation pressures until there is greater clarity on underlying price dynamics, the central bank should prepare to act quickly if the recovery accelerates faster than expected or if inflation expectations begin to rise. While employment rates in many countries remain low and inflation is rising, tightening monetary policy may be necessary to get ahead of price pressures even if it delays employment recovery. When we wait for better employment outcomes, we risk inflation increasing in a self-fulfilling manner, undermining the credibility of the policy framework and growing uncertainty. Spirals of doubt could hold back private investment and impede employment growth, precisely what the RBI tries to avoid when delaying policy tightening. Conversely, monetary policy can remain accommodative if inflation expectations remain below the RBI’s target and labour market slack persists. Thus, it is even more critical now to communicate transparently and clearly about the outlook for monetary policy in light of the unprecedented circumstances.

In addition, we need to prepare for the challenges of the post-pandemic economy. These include reversing the pandemicinduced setback in human capital accumulation, facilitating the growth of green technology and digitalization, reducing inequality and implementing sustainable public finances.

(Dr VVLN Sastry is a post doctorate in Economics and a PhD in Law & Public Policy. He is a passionate economist, financial analyst and law expert.)