Bond traders are easy. What about the economy?

 "The Indian economy is poised to reach pre-pandemic levels by the end of this year based on the trends observed so far, barring the incidence of a second wave that may be triggered by the fatigue with social distancing, the finance ministry said in its monthly economic report for October." A 10% rise in goods and services tax (GST) collection in October, incorporation of 85.283 companies compared to 71,164 in October 2019 and 109% of Long Period Average rainfall give cause for optimism. However, the pre-pandemic growth in GDP was a very feeble 3.1%, lowest in 40 quarters. After hitting a high of 8.3% in 2016-17, the economy grew by 7% in 2017-18, 6.1% in 2018-19, and 4.2% in 2019-20. Worse, nominal gdp growth, which is the basis of tax collection, fell from the budget estimate of 12-12.5% to a revised estimate of 7.2%. Although any growth, even at the anemic pre-pandemic level is welcome, it's not going to be easy. "India has scaled back expenditure, including on productive assets that aid economic growth, as the government is confronted with the risk of its budget deficit blowing out," wrote Vrishti Beniyal. The central government has already decided to increase fiscal deficit by 53%, from Rs 7.8 trillion, estimated in the budget, to Rs 12 trillion. The states had estimated a consolidated deficit of 2.8% of GDP for 2020-21 but this is now expected to rise to at least 4.6% of state GDP. "The pandemic-induced growth contraction and additional spending to support the needy amounting to a little over 2 percent of the economy are likely to push the combined fiscal deficit to 13 percent of GDP this fiscal -- nearly double of the last year, according to a report." Government debt is expected to increase from under 70% to over 80% of GDP, to Rs 75.6 trillion. Higher debt load means higher interest payments so the Reserve Bank (RBI) has been trying to bully the bond market by refusing to accept bids at higher yields for its bond auctions on at least 4 occasions in the last 2 months. "The devolvement at four consecutive auctions led bond traders to conclude that RBI does not want the 10-year bond yield (or interest rate) to cross 6%," wrote Aparna Iyer. The lower the price at which the bonds are sold, the higher will be the yield. Normally, yields on short term papers are lower because risks are easier to anticipate than on longer term bonds. This is the yield curve. The RBI wants to flatten this curve by forcing down yields on 10-year bonds. But, "The spread between the operating rate, which is the reverse repo rate, and the 10-year government security yield is 250 basis points. The spread between 3-year government security and 10-year is 120 basis points," wrote Murthy Nagarajan. Because retail inflation was 7.34% in September due to rising food prices, the exorbitant taxes on fuel are yet to feed through, and even core inflation, which strips out food and fuel prices, is high at 5%. A few limbs of the economy are growing. But, will that spread to the rest?