Govt Can Use Three-Pronged Strategy To Tackle Energy Shock: HSBC Economist

(MENAFN- KNN India) New Delhi, May 9 (KNN) The central government can deploy a three-pronged strategy to mitigate the impact of a global energy shock on domestic growth, according to Pranjul Bhandari, Chief India & ASEAN Economist, HSBC.

Speaking to ANI, Bhandari noted that while energy shocks typically push inflation higher and slow economic growth, governments tend to prioritise growth, leaving inflation management to central banks.

She highlighted that India appears to be drawing on policy measures used during the pandemic to address current supply-side disruptions.

Three Key Policy Levers

Bhandari said, "I think from the government's point of view, they are thinking about it as more sort of a growth shock because generally it's the central bank in charge of inflation so they think about prices while the government is about growth....So the government can do a lot of public capex and then they get jobs and incomes from there. So I would say a three-prong strategy: credit guarantee schemes, high unemployment benefits like NREGA and number three, public capex."

"My general sense is that there are a few things that the government can do. First, handhold the small firms because they are very sensitive to price increases and a lack of inputs. So they've done that with that credit guarantee scheme that they announced overnight," she added.

Rural Stress and El Niño Risks

Bhandari cautioned that if industrial activity slows due to high energy costs, migrant workers may return to rural areas, increasing pressure on agricultural livelihoods. This risk could be compounded by a potential El Niño event, which may adversely affect farm output.

In such a scenario, rural employment schemes and public works programmes would play a critical role in supporting incomes, as workers often shift to construction activity when agriculture underperforms.

Manufacturing Trends and Front-Loading Effect

On recent trends, Bhandari pointed to a rebound in the manufacturing PMI in April after a dip in March. She attributed this to firms accelerating production and building inventories amid concerns over future energy availability.

"Many manufacturers, because they had energy input available, I think they were of the view that let's quickly produce things and stock it up. What if we don't have energy in the next few months? And we saw a lot of stockpiling. We had a lot of inventory build up," she noted.

This 'front-loading' of production has temporarily cushioned the economy from the full impact of the energy shock. However, she warned that once this inventory build-up phase ends, the negative effects on growth are likely to become more visible.

Delayed Impact on Growth

Bhandari emphasised, "I think the big takeaway for me is that an energy shock generally is negative for growth. Eventually, I think, the shock will be negative for growth, but we may not see all of the negative impact upfront and quickly, because upfront, we are also getting the help and support of the front-loading manufacturing activity that many factories are doing. So that painful information will probably come a little later when front-loading has ended."

(KNN Bureau)

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