BS BFSI Summit: Economic recovery is on but risks lie ahead, say economists

There is still uncertainty around domestic demand, capital expenditure by state governments, non-performing assets of the banking sector, and supply-side constraints

Economists are in concurrence that the economy is getting its strength back after the second wave of the Covid-19 pandemic, but there is still uncertainty around domestic demand, capital expenditure (capex) by state governments, non-performing assets (NPAs) of the banking sector, and supply-side constraints.

At Business Standard's BFSI summit, Sonal Varma, Nomura's chief economist for India and Asia ex-Japan, said, "It is very clear that India is in the midst of the business-cycle recovery."

However, she cautioned that this has been a very uneven recovery and the real gross domestic product is still 10 per cent down, compared to the pre-pandemic period.

"It is in that background that the outlook is a lot more uncertain. While the balance sheets of certain corporates are better, I don't think we can make remarks on aggregate balance sheets," she added.

Varma said the economy doesn't have enough supply to keep up with the V-shaped recovery of goods, seen from the demand side.

Sajjid Z Chinoy, JP Morgan's chief India economist, said if the economy grows 9-9.5 per cent in the current fiscal year, it will still be below pre-pandemic levels of income.

"We could be between 5 and 6 per cent below that path, which is better than we thought a year ago, but it's still a large gap to make up for. The policy needs to keep that in mind, that we've got that 5 per cent income loss that we have to close, as soon as possible," he said.

HSBC Chief India Economist Pranjul Bhandari said NPAs of banks could still rise.

"I don't think we've seen the worst yet. Bank NPAs tend to rise a few years after an economic slowdown. These could be scars the pandemic leaves behind,” she said.

Kaushik Das, chief India economist at Deutsche Bank AG, said if there is no third wave, the economy could still grow 10-10.5 per cent this fiscal year.

He said the instant the pandemic’s second wave hit India, economists started scaling back the growth forecast.

However, Aditi Nayar, chief economist at ICRA, revealed that she raised the growth projections for India to 9 per cent, from the earlier 8.5 per cent.

She said agriculture and power were two sectors that were doing well, even when the economy was on a downswing.

"What we are seeing from the Mahatma National Rural Employment Guarantee Act work demand, rural unemployment statistics, and rural vaccinations is that rural non-farm demand is ready to come back and support the overall rural sector," she said.

Soumya Kanti Ghosh, group chief economic advisor, State Bank of India, said there is a clear case of divergence with growth optimism when it comes to private final consumption.

"It will continue to remain a challenge since the second wave impacted household savings," he said.

He said another concern the government needs to address is fuel tax, seeing that high prices on this front could create terms of trade against rural areas with food inflation subsiding.

Chinoy said the larger issue the economy has to recognise is that no country in the world has grown 8 per cent for one or two decades without strong exports.

"We have got to create the preconditions for India to increase its export share in the world. Merchandise exports are a lot of focus. But may be our comparative advantage is in services. Our global share of services has actually increased in the past five years, from 3 per cent to 3.5 per cent," pointed out Chinoy.

Bhandari said two new growth drivers have emerged - rise in high-skilled exports and the start-up ecosystem.

“But these are still small players on the fringes who are not at the heart of economic growth," she observed.

Chinoy said the challenge in the years to come would be to bring consolidated deficit down, maintain public investment levels and raise them.

Nayar said while revenue receipts of the central government would be much higher than budgeted, expenditure would also be modestly higher than the Budget Estimates and there would be some improvement in fiscal consolidation.

However, the key concern is whether states would go for higher capex, as well as fiscal consolidation, she pondered.

Das said investments from the private sector would come in the second half of 2021-22, because there are several state elections lined up.

The International Monetary Fund has cut India's potential growth rate to 6 per cent, from the previous 6.25 per cent, due to the impact of the pandemic on investments and human capital.

Bhandari said while asset monetisation is a fantastic idea, the prevalent risk is it could hit a similar snag as the public-private partnership model.

Moreover, she said the bad bank can be pivotal, but the risk is that it could become more of a warehousing, rather than a resolution mechanism.

Similarly, production-linked incentive schemes are brilliant, but these are pursuing too many objectives, she cautioned.