Second wave of Covid-19 is now behind us. Localized lockdowns are opening, economic activity is coming back to pre-pandemic levels, and vaccinations are now proceeding apace with large, assured supply over the next few months. Reserve Bank of India (RBI) has eased monetary conditions for the stressed sectors and Government has extended its program for support to the vulnerable. With fiscal space available as tax collection ramps up and a large fiscal deficit penciled in, government retains the ability to push fiscal expenditure accelerator once economic activity normalizes.

As vaccination drives cover a larger proportion of the population, India will head back to stability both on lives and livelihood. We should now focus on the macroeconomic management for the medium term, especially as the global macro policies on inflation and interest rates reset. We delve into three key variables for India: public debt, inflation (or interest rates), and growth.

Public debt

Economic Survey 2021 covered dynamics between debt, growth, and interest rates. It said that “government [should] be more relaxed about debt and fiscal spending during a growth slowdown or an economic crisis.” This is “because the interest rate on debt paid by the Indian government has been less than India’s growth rate by norm, not by exception.”

Taking a cue from the Survey, government created a large fiscal space in Budget 2021 taking fiscal deficit targets higher. As we noted in an earlier article, this expansion has created a fiscal space of around Rs 40 trillion (or a fifth of the current GDP) over the next few years. As a corollary, the expansion in fiscal space leads to increased debt for government – India is expected to close FY2022 with a debt-to-GDP ratio of 90%.


Central banks around the world have become somewhat tolerant towards inflation over the last year or so. Many banks (like the Fed in the USA) now target average inflation and are comfortable if the rates of inflation go beyond their 2% threshold. European Central Bank (ECB) is also more accommodative. Having learnt from the multi-decade experience of Japan with its inability to stoke inflation even after a large expansion of the central bank’s balance sheet, central bankers are willing to take more chances.

At a time when central bankers are being more tolerant towards inflation, a combination of supply shocks (think semi-conductor industry) and demand shocks (think lumber prices due to sudden increase in housing demand) are stoking a rise in prices. An improved economic outlook, especially post vaccinations in developed world, has led to a sustained rally in the prices of basic commodities (iron, coal, copper, etc.) and energy (crude and its derivatives). The rise in prices of agricultural commodities are making countries sit up and put restrictions on exports.

The challenge with inflation is that the genie can get out of control very quickly and can be difficult to put back into the bottle especially when global policy makers are willing to be lenient. India needs to be vigilant to not end up in a situation of importing global inflation. Note the increases in Chinese producer price index and the sharp jump in freight rates across the world.

RBI, in its recent MPC meeting, noted that CPI inflation could increase to 5.1% in FY2022 from its earlier estimate of 5.0%, a modest increase in the forecast. However, the Q1FY22 numbers have exceeded RBI’s expectations. Controlling inflation within the limit of 2% and 6% is a key aim of India’s inflation targeting policy. A large bout of globally imported inflation could impact the accommodative stance of RBI and the interest rate trajectory in India. A higher interest rate has implications for debt management.


India needs to trace a path back to the trajectory of 7-8% annual real growth post the pandemic. This will feed into macroeconomic debt sustainability, increasing incomes which will pull a larger number of people out of the economic scars of Covid-19, and creating opportunities for increasing employment, incomes, and wealth generation.

A key part of the economic growth will be led by private sector investments. Globally we are seeing the resurgence of capital investment as growth picks up. The Indian banking sector has cleansed a large part of the non-performing assets (NPAs) of the previous cycle and is now sitting on large deposits looking for credit-worthy opportunities for deployment.

India has seized the opportunity to lead in creating a clean, green economy. This offers India a chance to reimagine its economy that is: (1) hyper-competitive relative to other leading economies; (2) inclusive to be able to provide jobs and prosperity to all its citizens; (3) sustainable in terms of carbon emissions, clean air and water, and health outcomes; and (4) resilient to deal with external shocks such as global financial crisis, pandemics, and extreme weather.

Policy actions

Debt sustainability depends on growth. The Rs 40 trillion fiscal space can be channelized in to investments in hard infrastructure (roads, power, ports, etc.) or in soft infrastructure (like education, health, or social safety net). These targeted investments will power the recast of India’s economy for its citizens. In India, over the last two decades, economic growth rate has outstripped nominal interest rates – that is a key reason India’s debt-to-GDP has trended down over the years pre the pandemic. If the nominal growth of the economy is higher than the nominal rate of interest, debt remains sustainable.

India needs to be prepared if global food inflation seeps through. India, with its large procurement programs, has created a significant inventory of staples – the reverse logistics of distributing them to cool market prices needs to be fine-tuned and ready. Inflation can create sharp movements in currencies as global capital finds a place to hide. India now has significantly higher foreign exchange reserves and a more stable current account than in the 2013 taper tantrum. RBI can keep swap lines open and strengthened between large central banks.

India supported its micro, small and medium enterprises (MSME) with moratorium and extended credit-linked guarantee scheme (ECLGS) over the waves of Covid-19 with more than 10 mn units benefitting from ECLGS. The sector is a large creator of employment and may require continued support to get back on its feet after the two waves. Many new opportunities will open for MSMEs in the new sectors noted below.

Harnessing global trends

A clean, green economy is going to be a key, competitive requirement in the global markets. With the European Union considering carbon taxes and countries like China starting their internal carbon pricing markets, the focus on green is here to stay. With extreme climate events concentrating the minds of global leaders as they head to the COP26 meeting later this year, action on the four key climate intensive sectors will only increase: (1) power and energy, (2) transport, (3) agriculture, and (4) materials like cement, steel, etc.

With policy stability and innovative financial instruments (that pool in capital from developed countries and guarantees from multilateral institutions), India can attract many hundreds of billions of dollars a year into new green infrastructure creation. This investment push, coupled with India preparing itself for the new competitive dynamics in a green world, can create new sources of economic growth.

The last three months have shown strong export growth – the China+1 strategy of global firms and production linked incentive schemes can create further boost to job creation, growth, and foreign exchange incomes.

A job- and investment-led growth will be key for India to spread the fruits of growth with its young population. The time to rebuild India bigger and better is now! With the right medium-term macroeconomic balance and harnessing the big global trends, India can benefit from a sustained period of growth in incomes and wealth which can be reinvested into fulsome social infrastructure and security nets.

Views are personal.

1 Comment on “India: Getting ready for global macro resets

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