Rapid pace of vaccination and bridging of health infra gaps to support durable recovery: Finmin
The finance ministry on Friday acknowledged that economic recovery remained “uneven” in June, with certain indicators – such as port and air traffic, PMI manufacturing and services – exhibiting “lagged revival” from the impact of the second Covid wave.
However, sustained momentum in capital expenditure this fiscal, particularly in the road and rail sectors, augurs well for growth revival, the ministry said in its monthly economic report.
The ‘Rs 6.29-lakh-crore relief package’, announced by finance minister Nirmala Sitharaman last week, is expected to further oil the wheels of the capex cycle through the implementation of the production-linked incentive scheme (in electronics) and streamlining of processes for PPP projects and asset monetization, it added.
“Maintaining a rapid pace on vaccination and quickly bridging health care infrastructure gaps across both urban and rural areas would emerge as the most sustainable stimulus for durable recovery of the Indian economy,” the report said.
India’s average daily vaccination rate in June doubled to 41.3 lakh doses from 19.3 lakh in May, crossing the 36-crore mark in its cumulative vaccination coverage. But the challenge is to build upon this momentum on a sustainable basis, given the scarcity of jabs, especially in rural areas.
The government’s capex in the first two months of this fiscal rose 14% from a year before while revenue expenditure dropped 9%, signalling a front-loading of productive spending. The government has budgeted an impressive 30% rise in capital spending for FY22.
Analysts have said some parts of the economy may start looking up from July, as the impact of the second wave wanes and vaccination drive makes further headway. However, no substantial recovery is seen before September, when firms usually scale up output to replenish inventory in the build-up to the festival season.
Several agencies have, over the past two months, slashed their FY22 growth forecasts for the country to 8.5-10%. The Reserve Bank of India, too, have trimmed its growth projection to 9.5% from 10.5%.
The finance ministry report suggested that, along with a boost to investment, the relief package could improve consumption sentiment, with further enhancement of employment support under Aatma Nirbhar Bharat Rozgar Yojana, a Rs 7,500-crore credit guarantee scheme for on-lending by micro-finance institutions to small borrowers, and wider Bharat-Net digitisation coverage.
Similarly, free foodgrain until November and enhanced fertiliser subsidies under the package along with continued MGNREGA implementation would prop up rural demand in the coming quarters, the report said.
Of course, a sizeable chunk of the latest relief package (Rs 2.68 lakh crore of Rs 6.29-lakh-crore package) comprised just credit guarantees. Also, the net fiscal impact stood at just Rs 1.3 lakh crore in FY22, according to Nomura.
Chief economic adviser (CEA) Krishnamurthy V Subramanian recently said unconditional cash transfers might not be an appropriate tool to mitigate the blow of a crisis such as the pandemic. Instead, well-directed credit to vulnerable businesses and individuals, backed by sovereign guarantee, amounted to quasi cash transfers and could serve the needy better and boost consumption.
The finance ministry report said latest measures by the Centre to mitigate pandemic-related stress — especially in healthcare, travel and tourism and among the rural poor — are expected to improve credit offtake. The relief package included the expansion of the flagship loan guarantee programme limit to Rs 4.5 lakh crore from Rs 3 lakh crore.
Non-food credit growth improved to 5.89% year-on-year in the fortnight through June 18 from 5.74% in the previous fortnight but remained lower than 6.19% in the corresponding period of last year.
Conceding that the recovery in June remained patchy, the report also highlighted the improvement in some key indicators. Vehicle registration remained strong in June as states started to unlock. Highway traffic movement – as measured by toll collections – also witnessed uptick in June, indicating resumption of commercial activity. UPI transactions have rebounded to hit a record high of Rs 5.47 lakh crore in June. “Healthy monsoon coverage, water reservoir levels and MGNREGA employment bode well for the rural sector’s resilience,” it said.
The financial markets “continue to derive comfort from the accommodative monetary policy stance and RBI’s policy matrix of conventional and unconventional measures”. G-Sec yields and corporate bond yields mostly remained stable in June. While equity markets remained range bound last month, net assets under management of mutual funds rose to a record Rs 33.1 lakh crore by the end May, up 2.1% over April.