Post-Covid financial system won’t merely be re-inflation of pre-Covid financial system: Economic Survey

It said that supply-chain breakdowns triggered an interruption of the financial system’s supply-side which additionally squeezed demand, however it’s not right to see the pandemic associated financial slowdown as only a demand downside.
“…the post-Covid economy will not be merely a re-inflation of the pre-Covid economy. Simply building it back with demand measures is not a solution,” it mentioned.

The emphasis given to the supply-side in India’s COVID-19 response is pushed by two vital issues: first, Indian policymakers noticed the disruptions attributable to travel-restrictions, lockdowns and supply-chain breakdowns as an interruption of the financial system’s supply-side. “Although this also squeezed demand, it is not correct to see the pandemic related economic slowdown as just a demand problem as happens with most economic cycles,” it mentioned. Second, the post-Covid world shall be impacted by all kinds of things – adjustments in expertise, client behaviour, geo-politics, supply-chains, local weather change, it added.

The Survey has flagged dangers from rising inflation from each a tighter international liquidity situation and trade charge volatility in international foreign money. “In 2021, inflation picked up globally as economic activity revived with the opening up of economies. Inflation in the US touched 6.8 per cent in November 2021, the highest since 1982, driven largely by energy and food prices. As inflation worries are mounting, a distinct shift towards the unwinding of pandemic-led stimulus is taking hold. This may result in tightening of financial conditions, adversely affecting capital flows, putting pressure on exchange rate and slowing down growth in emerging economies,” it mentioned.

Highlighting the divergence between wholesale and retail inflation, it mentioned imported inflation is an issue and must be taken into consideration. The excessive WPI-based inflation charge in 2021 is essentially attributable to the low base of the previous 12 months, whereas retail inflation that had remained excessive throughout 2020-21 as a result of provide chain disruptions and excessive meals inflation moderated in 2021-22 on account of efficient provide aspect administration, leading to a divergence between WPI and CPI primarily based inflation, it mentioned. “…unanticipated increase in energy prices and emergence of industrial input cost pressure and high freight costs led to a sharp spike in WPI inflation in 2021. This was reflected in high WPI inflation in the fuel group and manufactured sector during the year. Thus, while on the one hand, low food inflation pulled down CPI, on the other hand high energy and input prices pulled up WPI based inflation rate,” it mentioned.

The Survey additionally said that the stability of dangers for international commerce is tilted to the draw back, with the largest danger from the pandemic, notably with resurgence of recent variants corresponding to Omicron. In addition to the surge in international inflation, longer port delays, increased freight charges, scarcity of transport containers, scarcity of inputs corresponding to semiconductors, with supply-side disruptions being exacerbated by restoration in demand, pose important dangers, inter alia, for international commerce.