For one, a fast goring economy would mean the government should get more money without flexing any fiscal muscles. That’s always good news for North Block. In the past, whenever the economy went through a fast patch, the government’s take went up without having to make any additional revenue mobilisation efforts.

All that we need to do for the next fiscal year thus would be not to inflict some avoidable blows, such as, we had seen in the recent past. Please do not embark on earth-shattering reforms or assertions of governmental authority like enormous demands for retrospective tax dues. Maintain an even keel and a boring predictability in the policy framework.

Secondly, we must also avoid the economic booby traps, which will be strewn all over. What could be these challenges to a smooth passage in the forthcoming year.

First of all, the price line. With huge expansion of government expenses through additional borrowings and bank sponsored accommodation during the lock-down phases, the level of liquidity has mounted. Providing income relief to people and bank funding to beleaguered corporates have all added to the money flow. These would necessarily work out somewhere —either in an asset price bubble or in general rise in prices.

It looks as though a great deal of additional liquidity is flowing into the financial markets. The unrelated rise in the Sensex and Nifty gives an inkling into funds flow. Instead of being spent on goods by the general public, it appears a disproportionate amount of money has gone to the upper echelons who are getting into more and more financial market investments.

Could this be a proxy for the greater inequality resulting from the funds flows dynamics of pandemic period. The pandemic has for certain hurt the economically weaker worse than the more fortunate sections. Jobs losses in the unorganised and informal sectors were immediate and many lower level jobs have not come back.

The funds flow dynamics of the pandemic period have unavoidably created a condition for a subsequent financial system instability. We must be aware of these possible aftereffects.

The large amounts of funds which had to be extended to corporates and businesses would have to be rewound some time or other and cannot be postponed for indefinitely. Recalling overdue loans could result in financial insolvency of the borrowers which will which immediately affect sentiments.

Does it then imply when the day of reckoning comes and excess liquidiy starts unwinding, will the financial markets also get the first shocks and come down crashing.

Add to these, the large volume of funds flowing in from overseas through both foreign institutional investments in the secondary equity markets as well as foreign direct investment. These also have the potential of unleashing financial market instabilities.

We have witnessed such volatilities during the period following the 2008 global financial melt-down. As the taper tantrums began from around 2012, so were the sharp rise in reverse flow of funds to the US and collapse in the emerging equities markets. As this equity market investments were liquidated and repatriated foreign exchange rates plummeted. We had the phenomenon of the so-called Fragile Five” or five countries which suffered most instability.

Thus, in short are we heading into a period of potential financial market tumult.

Secondly, within the domestic economy, we are going to see a further worsening of the so-called twin balance sheet problems. The corporates have been saddled with large loans and shrinking revenues during the covid 19 lock downs. The banks on the other hand have been urged to keep providing funds to industry and businesses so that they could carry on their operations. Now time is fast approaching when these excessive accommodations have to be shrunk back to size.

These problems of a widespread loan default have been even otherwise highlighted by renowned economist Carmen Reinhirst.

Last year, when lock-downs were imposed and physical distancing norms introduced, the real economy was dented deeply. Now that the physical economy was coming back alive, we are staring the prospect of a financial sector melt down again. A sliding real economy has been bad enough with employment losses. But a financial sector problem could be invidious. The effort should be to halt any progression of the financial sector problems from when it appears.

In case of India the most immediate threat would be to keep the banking sector well capitalised and sound when some industrial bankruptcies can not be prevented. The problems of sticky loans would inescapably rise. The government would therefore have t find ways of blistering up the public sector banks, which are the mainstay of Indian financial sector. Of this objective could be fulfilled one has to watch. (IPA Service)