Economic recovery after Covid-19 shock make Samvat 2077 shimmer with hope

 

Improved economic performance, better corporate earnings, and a likely global economic recovery could be the comforting factors for the markets in Samvat 2077.

Diwali comes just at the time when the unlock process is probably mid-way through and there is a smell of optimism around as the high frequency economic indicators point upward. The positive thing one can say as we begin Samvat 2077 is that things will look only positive starting now with the only caveat being that we have a normal monsoon next season. It is reasonable to assume that even if there is another wave of the pandemic the response of the government will not be a lockdown. This is the good news.

Most estimates for gross domestic product (GDP) growth or degrowth this year are in the single digit range with CARE estimates being -8.2 per cent and Reserve Bank of India (RBI) -9.5 per cent. Given that growth in Q1 was -24 per cent, it is axiomatically assumed that progressively the growth rates will improve with a positive growth rate being achieved in Q4. This goes along with the rather prudent move by the government to unlock the economy in a calibrated manner. The interesting thing is that right up to Diwali in 2021, the numbers will statistically look very good. This is because the Q1 and Q2 growth numbers in FY22 will be very high as they will come over double digit negative growth numbers in the same period of FY21. The important thing to watch out for, however, will be the pace of job creation as the lockdown has induced considerable layoffs and salary cuts, which must be restored to reignite the consumption cycle.

The second factor to look out for will be inflation. This will be less predictable as it has been driven by the food basket, which is dependent on the supply conditions. The comfort here, however, will be that since CPI inflation has been high this financial year (so far in the range of 6-7 per cent), there will be a high base effect that will moderate these numbers. However, there would be swings in the core inflation component, which is relatively stable in the 4 per cent range and could show a spike in the early part of FY22. As inflation comes down progressively, there will be more space provided to the RBI to lower rates further. While the December 2020 policy is unlikely to witness any rate action, we could expect further rate cuts in calendar 2021 depending on the trajectory of inflation.