NEW DELHI: With the second wave of the Covid-19 pandemic continuing to wreak havoc on India’s healthcare infrastructure as well as the country’s economy, it could take several months before glimpses of an economic rebound could be seen. Even as daily new infections have started dropping recently, it still “remains high for comfort” and the macro-economic costs of this wave are likely to spill over into July, the central bank said in its annual report for 2020-2021.
“The near-term outlook is clouded, with an accentuation of downside risks and potential externalities of global spillovers,” the RBI said.
The slow pace of inoculation and bleak global economic outlook further add to uncertainty. Already, some economists have trimmed India’s real GDP forecast to settle at 7-8 per cent in FY22. RBI, which has retained its projection of 10.5 per cent for the current financial year, may follow suit given that its forecast was based on the assessment done in March. But, the RBI is so far convinced that the current scenario is less severe than last year when the economy slipped into a recession with a historic 24 per cent contraction in Q1, translating to Rs. 11 lakh crore in lost national output.
As per the RBI estimates, the economic growth is seen at 26.2 per cent in Q1, 8.3 per cent in Q2, 5.4 per cent in Q3 and 6.2 per cent in Q4. "This is the most optimistic scenario that can be envisaged at this juncture – it provides a limited window to establish strict pandemic protocols and logistics, ramp up vaccines production and medical supplies, fill gaps in the health infrastructure and build up stocks, especially of vaccines, in preparation for the next wave of infections. In all other outcomes, losses in terms of lives, jobs and output are likely to be adverse and long lasting" the RBI noted.
Preliminary estimates of several high-frequency activity indicators show that April and May was a complete washout. Consumer sentiments have been particularly battered during the last three weeks of April. The services sector is still "wounded". Private investment remains the missing piece in the story of the Indian economy. Even though India’s merchandise exports and imports show nascent signs of recovery, the worsening global trade environment due to renewed Covid-19 onslaught may impinge upon external demand, the report stated.
On the brighter side, however, agriculture and allied activities emerged outliers. An important factor that brightens the prospects of the recovery is the fiscal policy stance. “Fiscal policy, with the largest capex budget ever and emphasis on doing business better, has swung into a crowding-in role. It is apposite now for Indian industry to pick up the gauntlet,” the RBI said. In FY21, The gross value added growth in the industry contracted sharply by 7.4 per cent on a year-on-year basis.
Importantly, the RBI said that the government must adhere to a clear exit strategy and build fiscal buffers, which can be tapped into in events of future shocks to growth.
In absolute terms, the fiscal deficit for the current financial year is estimated to be Rs 15.07 lakh crore. Assuming other budget estimates to remain unchanged, the additional surplus that the RBI recently injected would take it down to Rs 14.63 lakh crore. Economists say that the surplus will offer a buffer to absorb the losses in indirect tax revenues that are anticipated in May-June 2021 and provide the fiscally stretched government with room to provide more relief measures to alleviate the impact of the second COVID-19 wave.
RBI expects the upsides to growth to come from the capex push by the government, rising capacity utilisation and the turnaround in capital goods imports.
“For a self-sustaining GDP growth trajectory post-Covid-19, a durable revival in private consumption and investment demand together will be key to revival as they account for around 85 per cent of GDP. In view of the limited share of government consumption demand in GDP (at around 13 per cent in 2020-21), a rebound in private demand is essential,” according to the central bank.
While there has been an increase in capex outlay, it may not be adequate unless supported by private investment which is not forthcoming, pointed out Madan Sabnavis, chief economist, Care Ratings.
As for price instability, the RBI said that it remains a key concern constraining monetary policy from utilising any available room to support growth. Inflationary pressure on pulses, edible oils and few other common consumer items might continue for some time due to supply-demand imbalances as a result of intermittent shutdown of economic activity due to the pandemic. Taking into consideration all these factors, CPI inflation is expected to average 5 per cent during 2021-22 --- 5.2 per cent in Q1:2021-22; 5.2 per cent in Q2; 4.4 per cent in Q3; and 5.1 per cent in Q4, with risks broadly balanced.