Viewpoint: Attaining Macroeconomic Stabilization

04 APR,2022 | MEDC


 

  • Covid cast a long shadow over the global economy for over two years, and the Ukrainian crisis is now posing new challenges to it. The impact of the sanctions imposed on Russia in view of the unfolding events will serve to further weaken the many physical, digital and financial chains of globalization. These disruptions to the global supply chain come at a time when production and trade are already under strain, with many parts of the world not yet having won the battle against Covid. Inflationary pressures are being generated around the world, and the financial resources of many governments are being exhausted by efforts to preserve production and welfare during the long battle with the pandemic.
  • There is now a real chance of the global economy entering stagflation or recession. While it is true that central banks have grasped the underlying mechanics of stagflation and recession better than they did in the 1970s, it is equally true that they could be running short of policy options, and thus unable to do anything much about it. That probably explains why investors everywhere have become so skeptical, and why investments have stalled globally. Attaining macroeconomic stabilization is not easy, but it is essential to reviving the economy, both at a national and at an international level. RBI will need to ensure that its policy instruments remain compatible with those of other major central banks in dealing with the inevitability of the new macroeconomic instability permeating the world.
  • The Ukraine crisis has led to rises in fuel prices, and that is manifesting itself in food inflation – which hits the poorest the hardest. India is doing wisely by moving rapidly towards alternative energies, including green hydrogen fuels. However, the shift is going to take time. In the meanwhile, the rising energy import bills, and widespread supply-chain issues will lead to new upward pressures on the already-high inflationary trends. That is bound to have implications on economic growth.
  • India cannot afford to let manufacturing be hostage to supply-chain issues. As it is, the contact-intensive sectors of our economy (primarily in the services sector) have taken a hit due to Covid. The automobile sector, for example, is unable to work at full capacity due to semiconductor shortages. As far as the market goes, many fundamentals warrant a stock price correction, which may or may not be forthcoming. Investors are, obviously, exercising caution about equity exposures under such conditions. This will have ripple-effects throughout the economy.
  • There is now a huge unfinished agenda ahead of the Indian economy, primarily to try and build norms that promote socioeconomic development, given all the challenges (both internal and external) that we face. At the root of it is macroeconomic stabilization. Unless inflation remains within the RBI’s comfort zone, and impediments to economic growth are systematically removed, all talk of empowering the bottom of the pyramid will remain hollow. Our economy is today at the crossroads … but we trust our policymakers to take the right decisions.

*Picture Credit: Google

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