Second wave may have led to output loss of Rs 2 lakh crore: RBI 

NEW DELHI: The Indian economy is likely to suffer an output loss of about Rs 2 lakh crore in 2021-22 -- all of it expected to be contained in the April-June period -- as the country continues to wrestle with the second wave of Covid-19 pandemic, according to the Reserve Bank of India (RBI).

The projected loss, following a historic 24 per cent contraction in Q1 FY21 that translated to Rs 11 lakh crore in lost national output, is lower than economists' forecast of Rs. 5-6 lakh crore. While SBI Research pegged the current quarter's nominal GDP loss at Rs 6 lakh crore, Barclays estimates it at Rs 5.4 lakh crore given that the lockdowns will last only till June-end.

For the full year, nominal loss recovered in the second half of the year resulting in an annual loss of Rs 6.1 lakh crore, while real GDP loss stood at Rs 10.6 lakh crore in FY21. Factoring the potential loss of economic output, the RBI had alredy pegged GDP growth in the current fiscal at 9.5 per cent, down from 10.5 per cent -- consisting of 18.5 per cent in Q1, 7.9 per cent in Q2, 7.2 per cent in Q3 and 6.6 per cent in Q4. Its previous growth estimate in the four quarters was 26.2 per cent, 8.3 per cent, 5.4 per cent and 6.2 per cent. Broadly, the consensus forecast for FY22 GDP growth is between 8-10 per cent by most analysts and brokerage houses.

In its latest monthly bulletin released Wednesday, the central bank has assessed that the renewed wave of infections and the regional lockdown, rather than a nationwide lockdown like last year, has basically hit domestic demand hard. However, RBI believes, cautious optimism is returning, supported by several other economic indicators such as better GST collections and steady exports.

“This (second) wave has fanned into smaller cities and villages, sapping rural 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 compared to last year amidst pandemic protocols,” the RBI bulletin said.

Among sectors, the consumer goods sector is seeing a slowdown in discretionary purchases such as large appliances, apparel and beauty products in the June quarter. Then, vehicle sales fell sharply in May over April, while the aviation sector continues to suffer significant losses. Localised lockdowns also prompted the construction sector to record a decline in activity during April-May 2021. However, the silver lining was merchandise exports saw a robust growth in May with some of the worst-hit sectors such as engineering staging a smart recovery.

"Going forward, notwithstanding the second wave, GST collections in 2021-22 (so far) have also 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 RBI bulletin said. 

Noting that the pandemic is a real shock with real consequences, the central bank believes there is a need to ensure that the recovery is built on a "solid foundation of investment and productivity growth".

“Life- and work-style transformation such as increased remote work and online shopping may likely endure. When patterns of demand shift, some firms may face closure," according to the RBI bulletin. 

While some industries may become permanently smaller, at the same time, existing firms in industries experiencing increased demand may expand and new ones will emerge.

The RBI bulletin further added that three sectors with the greatest growth potential in the post-recovery decade include: digital technologies; biomedical science (along with its applications in healthcare); and technologies that address various challenges to sustainability, especially those pertaining to climate change.

On inflation, the RBI said that it sees price instability as transitory, even as markets are convinced that inflation is rising into the long-term and will force the hand of monetary authorities to abandon ultra-accommodation. Accommodative monetary policy is when central banks expand the money supply to boost the economy.

Going forward, the speed and scale of vaccination will shape the path of recovery, reiterated RBI, adding that “greater improvement was expected by early July with case counts subsiding".