In a recent report it was revealed there is no proper relation between the real economy and financial markets also the possibility of capital flight. In the month of March, India had imposed one of the strictest lockdowns which resulted in a harsh contraction of 23.9 percent in the India GDP growth rate.
“This lockdown has led the country to detain the pandemic-induced death rate to one of the lowest in the world, and the economy is now witnessing a sharp V-shaped recovery.” Said the Department of Economic Affairs.
They continued, “Relative to these advanced nations, India GDP contraction at 23.9 percent is slightly higher. The higher contraction has resulted from the stringent lockdown that India enforced in the April-June quarter. India enforced the most stringent lockdown as reflected in the Government Response Stringency Index developed by Oxford University. The lockdown has enabled India to restrain the pandemic induced death rate to one of the lowest in the world…as countries unlocked in the quarter starting in July, recovery is underway globally. India too is witnessing a sharp V-shaped recovery.”
The Ministry went on to add that the indications show an improvement from June onwards. Though the macroeconomic indicators show a path towards a V-shaped recovery, improbability still continues because of the pandemic and the subsequent influence on the flexible demand.
“Residual uncertainty persists because of the effect created by the pandemic on the precautionary motive to save which sharply affects the demand for discretionary goods and services. Unlike previous crises that originated from economic factors, the uncertainty in the current crisis stems from health factors originating from the pandemic. As a result, the uncertainty on discretionary items is likely to influence recovery,” the report had read.
The government showed the belief that the economic condition will improve soon. Government’s consumption and spending have also provided a degree of relief, with the central government’s revenue expenditure, net of interest payments and chief aids have risen by 33.7 percent in the first four months of the year.
The report though highlighted, the disconnect between the real economy and financial markets as well as the possibility of capital flight.
“Risk-taking sentiment has returned with global and domestic equity markets on an untamed recovery path, reaching pre-COVID highs and recouping most of their losses. The recent gush of liquidity in emerging markets is driven by low-interest rates, unprecedented monetary priming by major global central banks, and optimistic prospects of the Covid-19 vaccine. Stock markets are deriving their inexplicable buoyancy from this global surplus liquidity … This, however, raises concerns of an underlying disconnect between the real and financial sectors,” it said.