The announcement of the National Statistical Office that India’s GDP during the second quarter of the current fiscal grew by 8.4%, which indeed is well above RBI”s estimate of 7.9%, suggests that the Indian economy has at last recovered from the crippling effect of the second wave of the pandemic.

Encouragingly, as against the contraction noticed in all sectors except agriculture and electricity during the Q2 of the previous fiscal, this time round, all the sectors did well: indeed, grown sequentially. With agriculture recording a growth of 4.5% and with nominal GDP for Q2 that stood at 35.73 lakh cr surpassing the pre-Covid Q2 level of 35.61 lakh cr, the recovery path appears to be well-grounded.

No wonder, if the Chief Economic Adviser, Krishnamurthy Subramanian, taking note of the first quarter GDP growth of 20.1% and the first half of the fiscal witnessing a growth of 13.7%, said that India is well on the way for a record double digit growth during fiscal 2022. He further states that in spite of the base rate effect, this noteworthy growth rate emphasizes that the recovery process is all set to continue.

As against this official claim, independent economists are however, expressing doubts about the extent of sustainability of the recovery process, particularly in the light of insipid private consumption that accounts for almost 54.5% of the GDP, which is still languishing below pre-Covid levels. Even the employment-intensive sectors such as construction, retail and hotel industry are still to pick-up momentum to catch up with the pre-pandemic levels.

The government spending on Capex to boost growth is also losing momentum: gross capital formation decelerated in September quarter to 11.4 lakh cr as against a peak of 13.3 lakh cr in March 2021 quarter. Demand and investments are still to see durable pick-up and in the light of the fact that domestic economy was grappling with low demand and subdued investment climate even before the pandemic, one wonders if they pick-up appreciable growth immediately.

Added to that, Corporates are evincing no interest to commit fresh investments despite the fact that the government had slashed tax-rates substantially. Ironically, big industries are sitting pretty with accumulated cash out of tax savings instead of making fresh investments, while SMEs, though willing to borrow for expansions, banks are perhaps not ready to lend them fearing bad debts. Net result is: no growth in private investment.

Amidst these woes, there emerged yet another threat to the economy in the form of a new Covid-variant—Omicron. Though WHO declared that Omicron poses a “very high” global risk, as of now, it is not clear if it poses the same level of threat to mankind and economies as the earlier variant. Granted, it may not lead to imposition of such strict lockdowns as witnessed earlier, but it is certain to impact the mobility of people, which means, contact-intensive service sector, which accounts for 60% of our GDP, is likely to suffer adverse consequences. This may, in turn, derail the recovery process of our economy.

There is yet another threat to the economy, of which, there is no ambiguity: rising inflation. The accommodative monetary policy of the RBI served the economy well in the early phase of the pandemic. But the delay in withdrawing the excess liquidity in the system by the RBI, despite average inflation remaining above the targeted rate, has paved the way for high inflation to stay afoot. With the wholesale price inflation reaching 12.54%, the highest in five months, it is only a matter of time before it gets translated to higher retail prices.

Here, it is also pertinent to note that the traditionally low inflation countries like the US and Germany are reporting inflation close to 6%, a three decadal high. No wonder, if the supply bottlenecks re-emerge, while a sudden fall in oil prices by $10 per barrel is a subtle pointer towards a looming recession. The hawkish pronouncements of the Fed to abandon its accommodative stance are a clear indication of how bad the global economic scenario is. In such a deteriorating economic scenario, taming inflation may become a real challenge for India.

But high inflation impacts the poor disproportionately, for they do not have staying power nor are there any social safety nets. In such a scenario, demand for consumption suffers adversely. Which means, derailment of growth process, for that is how inflation’s remedy—high interest rates—operates.

In the light of these impending challenges, all that feel-good factor that the Q2 growth in GDP generated gets evaporated. In view of this, the government and the RBI have to perhaps, recalibrate their policy measures in such a way—RBI maintaining the status quo of policy rates while mopping up liquidity and government accelerating its Capex-spending, either directly or through a public institute more so in the light of there being no growth in private investment —that they arrest rise in inflation while supporting the growth in economy.