This is the first time that RBI has come out with economic scenario analysis for the country (Monetary Policy Committee Report, October’20).
A cursory glance suggests that about 67% of the indicators are in the top two quadrants, signalling strong recovery.
When we in India first heard of Covid-19 pandemic at the beginning of the current year, we knew it has originated in China and knowing the impressive stride China has taken recently to revitalise its economy, we convinced ourselves that the country would be able to face the crisis head on. Meanwhile, the devil had engulfed almost all the nations.
Today, nearly 1.07million have lost their lives to this virus, more than one-sixth of global youths have lost their jobs, more than 90 million people have been reduced to extreme poverty, according to recent estimates. In India this calamity has taken lives of nearly 0.11 million people, unemployment rate exceeded 7.0%, income inequality has also risen much, although no firm estimates are available.
Along with global GDP and global trade, both of which have been predicted to contract by 4.5% and 11.9%, respectively, India’s GDP contraction has been predicted to be one of the highest. One plausible explanation provided earlier was the prolonged lockdown undertaken by the country, which has enabled it to reduce the mortality rates (stringency index developed by Oxford university) but the economic impact was disastrous.
It is an extremely difficult choice for a democratic government that is accountable for loss of human lives more than anything else. In addition, one major distinction between advanced economies and emerging economies like ours concerns the existing social welfare measures. The unemployment benefits by the US were boosted and in the European Union, around 40 million workers were placed in furlough schemes. As a result, the gross public debt as a percentage of GDP in advanced countries jumped from 105% to 132% during the year.
With the prevailing low or negative interest rates, the repayment may not pose a serious risk. India’s scenario is different and it would be interesting to list out the critical economic factors that need special focus in the remaining period of the current fiscal year to get the economy back to rails. Indian economy has been predicted to de-grow by 4.9% in 2020 by IMF before growing by 5.4% in 2021. These figures may undergo a change in the revised estimates due next week.
This is the first time that RBI has come out with economic scenario analysis for the country (Monetary Policy Committee Report, October’20). The base line forecasts (with assumptions that inflation will come down and no recurrence of Covid) de-growth at 9.5% in the current fiscal and rebound of a positive 10.1% in FY22.
It projects GCF as a percentage of GDP to rise from 25.4% in the current fiscal by 2.3% in FY22. The CAD projected to be 0.5% of GDP in FY21 is to move up to (-) 0.6% of GDP in FY22 to reflect more import demand.
A Scenario 1 (faster normalisation of supply chains with early arrival of vaccines leading to lower output losses) places GDP contraction at 7.5% in the current fiscal and stronger growth of 11.6% in the next year, while Scenario 2 ( adverse scenario: second wave of infections, continuing inflation, volatility in capital flows and exchange rates) puts GDP contraction in the current year at 11.5% and slower growth of 7.2% in FY22. It is apparent that strong assumptions on the specifics in an extremely volatile future enable RBI to put the eventualities under the probable scenario analysis framework, which is, however, in line with the practice of predicting the future.
The question is to what extent the strength of the demand conditions would pull up the positive elements being observed in some parts of the economy like agri-growth, good monsoon, rise in rural income, increased sales in cars and two-wheelers. Consumer confidence on the economic scenario, employment and income have been viewed positively by the latest survey. The Industrial Outlook survey by RBI has put manufacturing in the expansion zone in the coming quarters.
The PMI for manufacturing at 56.8 in September is encouraging. RBI has also attempted a dynamic factor model with the aid of 27 monthly indicators (IIP,PMI, auto sales, non-oil exports, non-oil, non-gold imports, power supply, OECD composite leading indicator, port cargo, rail freight, cement and steel consumption etc), which shows that index of economic activity is rising from April to September with more rapid recovery in industry as compared to services ( retail trade, transport, hotels, restaurants etc). This index is regressed with GDP to set up a dynamic factor model.
Private final consumption expenditures (PFCE), the primary driver of aggregate demand, had a steep fall in Q1FY21 more in urban areas compared to their rural counterparts. Consumer non-durables, tractor and two-wheeler sales are rising. A rise of more than 16% in Government final consumption expenditures (GFCE) is the lone factor supporting demand growth and it has to maintain its current share in Q3 and Q4 of FY21. However, gross fixed capital formation as a percentage of GDP is declining. The investment climate is to be made brighter with more liquidity in the system, soft interest rates and more risk sharing modules under PPP to attract private investment.
Defence, railways and road transport have accounted for more than 75% of the capex. Oil and gas, irrigation and energy sectors are to incur rising capex in the balance months to keep up the momentum.
The author is Former DG, Institute of Steel Growth and Development (Views expressed are personal)