Govt consumption will have to fuel demand in times of COVID-19: RBI

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August 25, 2020 4:34 PM

Government consumption will have to fuel demand till the economy comes out of the COVID-19 shock and regains pre-COVID-19 momentum, the Reserve Bank's annual report said on Tuesday.

RBI, RBI innovation hub, financial inclusion, banking services, COVID-19,latets news on RBIThe Reserve Bank’s survey for the month of July indicates that consumer confidence fell to an all-time low.

Government consumption will have to fuel demand till the economy comes out of the COVID-19 shock and regains pre-COVID-19 momentum, the Reserve Bank’s annual report said on Tuesday. Private consumption, which has lost its discretionary elements across the board, particularly transport services, hospitality, recreation and cultural activities, will come in later as “behavioural restraints may prevent the normalisation of demand for these activities”, RBI said in the annual report. Going forward, it said, “government consumption is expected to continue pandemic-proofing of demand, and private consumption is expected to lead the recovery when it takes hold, with non-discretionary spending leading the way until a durable increase in disposable incomes enables discretionary spending to catch up.”

An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum, it said. The Reserve Bank’s survey for the month of July indicates that consumer confidence fell to an all-time low, with a majority of respondents reporting pessimism relating to the general economic situation, employment, inflation and income. The respondents, however, do indicate expectations of recovery for the year ahead.

Urban consumption demand has suffered a bigger blow – passenger vehicle sales and supply of consumer durables in Q1 of 2020-21 have dropped to a fifth and one- third, respectively, of their level a year ago; air passenger traffic has ground to a halt. Rural demand, by contrast, has fared better, it added. The RBI expects GDP growth to remain negative this fiscal. The official estimates of GDP for Q1 FY21 by the National Statistical Office (NSO) are slated to be released on August 31. Meanwhile, the report said high frequency indicators so far point to a retrenchment in activity that is unprecedented in history.

“Moreover, the upticks that became visible in May and June after the lockdown was eased in several parts of the country, appear to have lost strength in July and August, mainly due to reimposition or stricter imposition of lockdowns, suggesting that contraction in economic activity will likely prolong into Q2,” it said. The total e-way bills issuance, an indicator of domestic trading activity, increased by 70.3 per cent in June 2020 on a month-on-month (m-o-m) basis. In July, however, it increased by only 11.4 per cent m-o-m and remained 7.3 per cent lower than a year ago.

The report further said the Google mobility trend, which tracks movement of people as a reflection of underlying economic activity, picked up in June 2020 from its levels in April and May. Mobility around groceries and pharmacies reached pre-COVID-19 levels, while mobility relating to retail and recreation was around 60 per cent lower than that of February 2020 levels, transit activity was 40 per cent lower. In July, however, moderation set in, with retail and recreation mobility stagnant, and some slide in people’s movement around groceries and pharmacies.

The report also notes that government consumption spending has provided a measure of relief, with central government’s revenue expenditure, net of interest payments and major subsidies, having risen by 33.7 per cent in the first quarter of the year. “Public finances have, however, been stretched by the imperative to mitigate the impact of COVID-19 and headroom for continuing support to aggregate demand may be severely diminished,” it said.

It stressed that the pandemic will inflict deep disfigurations on the world economy. The shape of the future is heavily contingent upon the evolving intensity, spread and duration of COVID-19 and the discovery of the elusive vaccine. Post-COVID-19, the overwhelming sense is that the world will not be the same again and a new normal could emerge. As in the rest of the world, India’s potential output can undergo a structural downshift as the recovery driven by stimulus and regulatory easing gets unwound in a post-pandemic scenario, the RBI said.

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