Even though we would like to forget 2020, in practice, we won’t be able to – not at least in the foreseeable future. The Covid-19 vaccine will – hopefully and eventually – silence the disease, but cannot erase the scars it leaves behind. To be sure, we are not out of the woods, yet there is some good news on the Covid-19 front as well as on economic activity.

We now see India’s real gross domestic product (GDP) for the current fiscal contracting 7.7%, compared with -9% forecast in September. Faster-than-expected revival ofactivity in the second quarter, which continued into the festive season, is one factor behind the revision. Consistent decline in overall Covid-19 cases is the other. More importantly, people are learning to live with the virus. Despite Covid-19 cases in India rising exponentially to ~4,213 per million on average in the second quarter from ~422 per million in the first, people mobility has been trending up.

As for economic activity, so far, the manufacturing sector has raced ahead of services – a trend likely to continue into the second half as contact-based services will remain subdued because of residual anxieties even after vaccinations begin. Also, the private sector contributed more to growth in the first half as government consumption spending was a laggard. This will have to reverse in the coming months as government spending support will be needed beyond the growth driven by pent-up demand. This will serve as a bridge to sustained demand revival. We expect the government to loosen its purse strings in the coming months.

One of the biggest surprises and policy challenges this year has been the unfettered uptrend in inflation, while the economy negotiates a deep recession. Inflation targeting was implemented in India in 2016. It is indeed paradoxical that we are seeing the highest inflation since then and that, too, in a year of economic contraction. This restricts the ability of the central bank to support the economy through rate cuts. India still has conventional policy space – unlike the west – but inflation comes in the way of utilising that space. That said, the Reserve Bank of India (RBI) has decided to look through inflation and guided the markets on an accommodative stance into next year as well. There is some way to go till the monetary easing percolates to the broader economy. Bank credit growth remains weak due to lower demand from creditworthy borrowers, and high risk aversion when it comes to lending to less creditworthy ones.

To sign off on a positive note, we expect India’s real GDP growth to bounce back to 10% next fiscal, riding primarily on a low statistical base.