Economy reviving, but renewed surge of Covid-19 infections poses risk: RBI

Economic activity is gaining steam, but considerable uncertainty surrounds the outlook owing to the renewed surge of the coronavirus infection, the Reserve Bank of India (RBI) said in its state of the economy report.

“Considerable uncertainty surrounds the outlook, although on balance, the gathering strength of the recovery and its broadening ambit hold out optimism and the will to survive and revive," the report, which is part of the RBI bulletin, said. In India, economic activity is gaining steam as Covid-19 incidence recedes and the ongoing vaccine rollout releases pent-up optimism.

“All engines of aggregate demand are starting to fire; only private investment is missing in action and the time is apposite for it to come alive. Broader measures of liquidity reflect easing of monetary and financial conditions in the system.”

The real gross domestic product (GDP) in the third quarter came positive, against the contraction of the first quarter. Advance estimates also suggest that the food grain product would be at a record high of 303 million tonnes for 2020-21, spread across all principal crops and in both rabi and kharif seasons.

As businesses reopen and consumers venture back to offices and shops, “the Indian economy has turned a corner,” said the report. Although the renewed vigour puts some pressure on inflation, with pulses production 6 per cent higher than a year ago, “inflationary pressures on the food front are set to ebb, but core inflation will warrant deft and dogged attention.”

High excise duties on petroleum products are a concern, but buoyancy in other heads of revenue could ease the pressure. This may “bring down pump prices of petrol, diesel and of cooking gas to more internationally comparable levels, improve the inflation outlook and expand consumer welfare.”

From an internationally competitive perspective, it is important for India to recover from inflation and turn to structural reforms to increase productivity and efficiency. The government, meanwhile, will have to stimulate the economy, and at the same time, ensure sustainable finances.

“Monetary authorities encounter a similar dilemma of conflicting pulls – ensuring an orderly evolution of the interest rate structure in the face of still enlarged borrowing needs against the need to remain accommodative and support the recovery.”

Whlie the policy authorities "exhibit resoluteness in their commitment,” markets are showing volatility due to uncertainties. "A shared understanding and common expectations will likely be the anchor in this turbulence. Markets have to rely on the track record of authorities during the most trying year in a century – of keeping markets and institutions functioning; of easing borrowing costs and spreads; of keeping finance flowing – in fact, there is very little else to hang a hat on.”

The RBI reiterated what the RBI governor has said time again that an “orderly evolution of the yield curve serves all.”

“There is little doubt today that a recovery based on a revival of consumption is underway," and that "all engines of aggregate demand are starting to fire."

But “private investment is missing in action,” which should be rectified soon, the report said.