Seventeen months since the outbreak of COVID, the global economy continues to face risks associated with the pandemic. While the IMF expects World GDP to clock a record expansion of 6.0% in 2021 and 4.9% in 2022 following the massive contraction of 3.2% in 2020, there is substantial divergence in recovery across countries as well as within each country.

For India, the trajectory of economic recovery is likely to follow the global script with few nuances. With phases of stringent nationwide lockdown in Apr-May 2020 and a severe wave of COVID resurgence in Apr-May 2021 now behind us, the economy is once again poised for sequential expansion amidst continued policy support. Nevertheless, the supply disruptions on account of COVID along with adverse global spill overs in the form of elevated commodity prices, has started to strain the internal economic balance, as manifested in elevated inflation pressures despite the presence of substantial negative output gap. Meanwhile, the unintended collateral benefit of recent experience is seen in substantial improvement in India’s external economic balance, with a benign current account accompanied by record high FX Reserves.

With vaccination coverage providing a pivot, the policy focus hereon could gradually shift from extremely accommodative towards normalization amidst the anticipation of organic economic recovery. While the fisc could stay on the projected course, monetary policy is likely to start taking baby steps for normalizing interest rates from Dec-21 onwards. Equally important would be expenditure switching policies in favour of exports via PLI scheme with stability in INR REER despite a likelihood of some weakening of spot INR with progress on DM policy normalization in 2022.