RBI 'cautiously optimistic' about economic recovery after Covid second wave

The Reserve Bank of India (RBI) saw reasons to be cautiously optimistic as the second wave of the pandemic seemed to have hit the domestic demand, while other economic indicators show the economy is coming back onstream.

While the Indian economy continued to wrestle with the second wave of the pandemic "cautious optimism is returning", the Reserve Bank of India said in "State of the Economy" report in its June bulletin.

“By current assessment, the second wave’s toll is mainly in terms of the hit to domestic demand. On the brighter side, several aspects of aggregate supply conditions - agriculture and contactless services are holding up, while industrial production and exports have surged amidst pandemic protocols,” the RBI said in its report, the lead author of which is Michael Patra, deputy governor of the central bank.

Citing statistical and mathematical models, the RBI said “greater improvement was expected by early July”.

Stressing that the speed and scale of vaccination would shape the path of recovery going forward, the article said that the economy had the “resilience and the fundamentals to bounce back from the pandemic and unshackle itself from pre-existing cyclical and structural hindrances”.

The central bank, in its June policy, revised down its gross domestic product (GDP) estimates to 9.5 per cent for 2021-22, from 10.5 per cent earlier. The GDP forecast was done with the assumption that the impact of the second wave would remain contained in the first quarter of the year, and will be helped by the base effect of last year’s "precipitous contraction”.

Quantifying the impact of the first quarter, the RBI said the second half could have chipped off Rs 2 trillion of 2021-22 output. However, the second wave has reached the smaller cities and villages, impacting rural demand. This time, the government may not also be in a position to spend as much as last year to revive the demand, the RBI said.

The central bank also defended the transfer of Rs 99,122 crore as dividend to the government. The nearly Rs 1 trillion transfer, according to the RBI, was "just 0.44 per cent of GDP,” and was generated through “saving on balance sheet provisions and employees’ superannuation and other funds”, the RBI said.

The Reserve Bank, the report said, is “free-ranging’ and conducting independent monetary policy, i.e., independent of fiscal dominance.

The central bank pointed out that notwithstanding the second wave, Goods and Services Tax (GST) collections in 2021-22 so far have fared better than in 2020-21, “infusing optimism that the revenue base for states will be protected with a growth rate of 7 per cent, and it may result in some surplus to compensate for the shortfall in the previous year".

The gross GST revenue collected in the month of May was Rs 1,02,709 crore, which was 65 per cent higher than the GST revenues in the same month last year.

However, pressure points remain. For example, vehicle sales have plummeted, and air travel has shrunk. But railway freight held up. Labour market weekly indicators that started waning since the first week of April, have also started recovering in the second week of June, the RBI said.

But the pressure on inflation will continue due to rising volatility in international commodities. The volatility in the last decade has weakened the relationship between CPI and WPI inflation.

Still, globally, the central banks see the surge in inflation as transitory and “talk down speculation about dialling back their easy policy stance,” while “frictions flare with every incoming data".

In India, the monetary policy committee (MPC) forecast a 5 per cent inflation for 2021-22 with risks broadly balanced.

"We have to learn to live with the virus, complementing vaccines with ramping up investment in healthcare, logistics and research,” the RBI said, even as vaccinations will blunt it. There was a need to ensure that the recovery was “built on a solid foundation of business investment and productivity growth", it said.