Deeper Loss of Income: Strong Fiscal Response Is Needed

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FY22 growth markdown will mask the deeper loss of income, using the vaccine rollout key for continuous revival.

The second revision review of FY21 GDP growth, from the full FY21 estimate, shrinks from the expected 8.0 percent to 7.3 percent contraction), strong performance in Q4.

These reviews will have an impact on our FY22 forecasts. The second wavelength of Covid-19 shows signs of decline (although low infections have persistent stickiness), resulting in graded concessions of lockdowns in some urban areas of major states, but with significant risks.

Strong vaccination rollouts are still only a few months away, and increasing trips by easing restrictions may at least be localized if not a third wave. The first official estimate from the National Statistical Office will be available only in January 2022, and the Q1 estimate will be released in August.

The growth outlook in the RBI’s annual report indicates that the upcoming MPC meet will slightly reduce the FY22 forecast from 10.5 percent in the previous year. The problem is that the economic loss is much larger than the GDP figures suggest, and economic activity is declining.

Preliminary forecasts are based on the quarterly financial results of over 3,000 publicly listed companies, and subsequent reviews will gradually capture the operating conditions of small companies, especially micro and small enterprises. Already, various surveys and representations from industry associations of service-oriented segments affected by the new lockdowns indicate that a significant number of businesses are permanently closed or under severe pressure.

Although the severity of the lockdown was low, it was the second consecutive year of shocks, leading to a significant drop in savings and access to non – formal funds from relatives and friends. The high cost of medical care in the private sector has also affected the savings of middle-income families. Significant rollback of immunizations can take at least two months.

The public health experience of the second wave, unlike the 2020 festive season, will deter anonymous people from resuming social work. While the monsoon is forecast to be very favorable this year, the spread of Covid-19 infection to tier 4, 5 towns, and rural areas is creating uncertainty. CMIE data on unemployment show a significant increase in both rural and urban areas. All this indicates that the revival from the paint-up demand will be even lower this year, as employees are running out of savings.

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