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    As the world opens up post pandemic, exit strategies, inflation rule economists' minds

    Synopsis

    While liquidity spurring growth is the desired outcome, the bigger fear is the exit strategy from this accommodation, and what it will mean to the global and Indian economy.

    ET Online
    For the next decade or more, the year 2020 will keep coming up in conversations and discussions alike. Be it in the context of the world testing the limits of its healthcare system, the shift to a new normal when it comes to work, the race for the COVID-19 vaccine, or governments' concerted efforts to shore up the global economy that threatened to come to a grinding halt.

    It will be the year that governments created trillions of dollars of additional liquidity to boost growth. As a result, stock prices soared, the 10-year US government bond yield touched 1.1% and companies' valuations rose to extraordinarily high levels.

    While liquidity spurring growth is the desired outcome, the bigger fear is the exit strategy from this accommodation, and what it will mean to the global and Indian economy.

    "I think, at this juncture, it is probably too early to speculate about exit strategies, especially if you're thinking about globally coordinated exit strategies," said Alfred Schipke, Chief of India Mission and Assistant Director of the Asia Pacific, IMF.

    He was speaking at a fireside chat at the ET India Inc Boardroom, which brings together industry leaders, policy makers and economists to discuss and deliberate key sectors of the economy. Over the five-day conclave, experts will uncover trends and challenges in the BFSI, Retail, Manufacturing and MSMEs sectors, as well as the economy as a whole.

    Schipke said there were three challenges that the IMF sees the world facing currently. One is the race between mutating viruses and the rollout of the vaccines, where uncertainty is still relatively high. The second is incomplete recoveries; this year around 150 economies would report per capita income levels below 2019 levels. The third challenge is the "Great Divergence" - across countries and also within societies, driven by differences in resources and the strength of the policy response.

    The IMF last month released the World Economic Outlook update, where it stated the global economy is projected to grow 5.5% in 2021, and 4.2% in 2022. The report revised the 2021 forecast up 0.3 percentage points on expectations of strengthening economic activity later in the year due to the Covid vaccine, and additional policy support in some large economies.

    The report also estimates a -3.5% global growth contraction for 2020, which is 0.9 percentage point higher than projected in the previous forecast. "While we project growth of 5.5%, there are still large output gaps. What we're seeing is that the economies are not operating at full capacity," he said.

    Inflation control
    In any developing economy, inflation is an important number. India is no different. Surging commodity prices could lead to cost-push inflation, and that can be a source of worry. "In advanced economies, we're currently looking at inflation projections where central bank targets are not met. As a matter of fact, we're looking at 1.5% inflation for advanced economies," said Schipke. He added that in emerging markets in developing economies, the global average for inflation is just about 4%, which is still lower than the historical average.

    For India, although inflation is expected to moderate in 2021, the inflationary risk for any broad-based cost-push factor needs to be closely monitored, he said.

    Removing policy bottlenecks
    "I think the potential for India's economy to continue to grow at high and sustainable levels are very good. But the key is to eliminate some of the bottlenecks," Schipke said.

    He said the financial system is critically important because, in order to channel savings to the most productive parts of the economy, there needs to be a functional financial system. India, he said, needs to continue strengthening the framework to deal with bankruptcies given that several corporates have high debt levels.

    The government, he said, has a huge role to play through public infrastructure investment. It can boost the economy, and ultimately overcome bottlenecks.

    "Commercially viable companies can be divested and passed on to the private sector. That would then give you the space to strengthen your public investment. I think the emphasis on public infrastructure investment is critically important to overcome the bottlenecks."

    Pandemic and inequalities
    The pandemic brought many changes to the work environment. It also increased inequality on multiple levels, disproportionately impacting labour markets across demographic groups. "I think at the global level, women have been adversely impacted. What we have also seen is that the ability to work from home has been key during the pandemic, and our study shows that the ability to work from home is lower among low income workers than for high income earners," said Schipke.

    While the government has tried to provide relief by enhancing social protection with in-kind support, cash transfers, and employment support through the Rural Employment Guarantee schemes, there is a lot more to be done. "While we're still coming out of the pandemic, it is important to continue providing support to those sections of the society because once people have been out of the labour market, you're losing skills, and that ultimately, then has implications for the future," he said.

    Way forward
    It is politically easier for a government to spend money to strengthen its national accounts, but the results are not as tangible they only materialize over time. One of the suggestions that Schipke offers here is calling investment in soft infrastructure critically important.

    There are global coordination mechanisms in the area of monetary fiscal policy, financial sector, climate change, which ultimately have humongous macroeconomic consequences. "These are all areas where I think more needs to be done, and the IMF is always willing to play either as a forum to bring groups together," he said.

    (For front-line insights on Economy, Retail, MSMEs, Manufacturing and Banking & Finance tune in to ET India Inc Boardroom (www.etboardroom.com) from 22-26 February and hear from over 50 industry leaders.)

    Watch the entire session with Alfred Schipke


    ( Also read: Resilience and a digital push – the Indian economy's defining factors)
    (This article is generated and published by ET Spotlight team. You can get in touch with them on etspotlight@timesinternet.in)
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