Post-Covid economy will not merely be re-inflation of pre-Covid economy: Economic Survey

“…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 said.

The emphasis given to the supply-side in India’s COVID-19 response is driven by two important considerations: first, Indian policymakers saw the disruptions caused by travel-restrictions, lockdowns and supply-chain breakdowns as an interruption of the economy’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 said. Second, the post-Covid world will be impacted by a wide variety of factors – changes in technology, consumer behaviour, geo-politics, supply-chains, climate change, it added.

The Survey has flagged risks from rising inflation from both a tighter global liquidity condition and exchange rate volatility in global currency. “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 said.

Highlighting the divergence between wholesale and retail inflation, it said imported inflation is a problem and needs to be taken into account. The high WPI-based inflation rate in 2021 is largely attributable to the low base of the preceding year, while retail inflation that had remained high during 2020-21 due to supply chain disruptions and high food inflation moderated in 2021-22 on account of effective supply side management, resulting in a divergence between WPI and CPI based inflation, it said. “…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 said.

The Survey also stated that the balance of risks for global trade is tilted to the downside, with the biggest risk from the pandemic, particularly with resurgence of new variants such as Omicron. In addition to the surge in global inflation, longer port delays, higher freight rates, shortage of shipping containers, shortage of inputs such as semiconductors, with supply-side disruptions being exacerbated by recovery in demand, pose significant risks, inter alia, for global trade.