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Inflation And Financial Stability Concerns In India Limit Room For Central Bank To Cushion Economic Activity From COVID-19 Shock: OECD
(16:54, 16 Sep 2020)

The economic outlook remains exceptionally uncertain, with the COVID-19 pandemic continuing to exert a substantial toll on economies and societies. Global output in the second quarter of 2020 was over 10% lower than at the end of 2019, an unprecedented sudden shock in modern times. The extent and timing of the pandemic shock differed across the major economies, but all experienced a sharp contraction in activity as necessary containment measures were implemented. Global trade collapsed, declining by over 15% in the first half of 2020, and labour markets were severely disrupted by reductions in working hours, job losses and the enforced shutdown of businesses. Without the prompt and effective policy support introduced in all economies to cushion the impact of the shock on household incomes and companies, the contraction in output and employment would have been substantially larger.

Output declines of over 20% occurred in some European economies and India, where containment measures were particularly restrictive, the report stated. The Paris based agency pointed that the output declines in 2020 are projected to be even deeper than anticipated earlier in Argentina, India, Mexico and South Africa, reflecting the prolonged spread of the virus, high levels of poverty and informality, and stricter confinement measures for an extended period.

Meanwhile, high public debt and contingent liabilities, or a low tax base, constrain the further use of fiscal policy to support growth and incomes of vulnerable groups in some large emerging-market economies, including Brazil, India, Mexico and South Africa. This shifts the burden of economic stabilisation to monetary policy, but rising inflationary pressures and concerns about financial stability in some of these economies, particularly India, limit central banks' room to cushion economic activity from the COVID-19 shock, the agency noted.

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