India’s pandemic recovery is in awkward full swing

  • India’s cities are bustling and economic growth is humming along once more, thanks to officials taking a pragmatic approach to managing the recent wave of Covid-19.
  • Still, rising impatience from bond markets over the government’s debt hangover puts the giant emerging market on an awkward trudge back to normality.
  • The economy has surpassed pre-pandemic levels and is expected to grow GDP 8% in FY23, per an official economic survey. India was frugal through the crisis but lockdown-led disruptions spoiled PM Modi’s fiscal consolidation plans
  • Officials now forecast the fiscal deficit in the coming financial year to be a higher-than-expected 6.4% of GDP, up from 4.6% in 2020.
  • Bond investors are unhappy with the government’s projected 32% increase in market borrowings, and pushed up 10-year bond yields to a more than two-and-a-half-year high after the budget was announced.
  • New Delhi responded by cancelling a bond auction this week. Soaring rates can increase costs for corporates too. Even though large companies and banks have cleaned up their balance sheets, private investment remains weak.
  • Business owners are waiting for a broader pickup in consumption rather than an uneven luxury-led recovery.
  • Rich city-dwellers are snapping up iPhones – Apple was the number one smartphone brand by revenue in 2021, per Counterpoint Research – but shoppers in poorer rural areas are holding back on spending INR5 on items such as a single-use sachet of Hindustan Unilever’s shampoo.
  • These are the same problems India faced earlier, compounded by two years of pandemic pain.
  • The Reserve Bank of India’s extremely dovish commentary on 10 Feb 22 calmed bond markets, as it left key rates unchanged and projected lower-than-expected inflation.
  • The central bank is in no hurry to raise interest rates, and India’s USD635bn of foreign exchange reserves mean it can manage foreign fund outflows as and when the U.S. Federal Reserve tightens.
  • That, however, leaves open the question of how India will manage the government’s borrowing plan. The streets may be back to life but there’s still a long way back to normal.

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