It would only be fair to state that in these trying times of Covid, the Reserve Bank of India (RBI) has undertaken conventional and unconventional stimulus measures and stepped up to its role of being the monetary policy administrator.
By Jagadish Shettigar, Pooja Misra
With the Indian economy growing at a record pace of 20.1% in Q1 FY22 as against a contraction of 24.4% in the same quarter of FY21, economists and analysts are largely of the view that the low base effect of the previous year’s record contraction has contributed to the same. It is important to note that while GDP numbers appear to look good, it is nobody’s guess that India’s GDP in Q1FY22 of Rs. 32.38 lakh crore is below Q1FY20 level of Rs. 35.67 lakh crore, ie approx. 9% lower, and is also below Q4FY21 of Rs. 38.96 lakh crore. However, keeping in mind that during Q1 FY22, the country had faced a humanitarian and economic crisis due to the second virus wave, macroeconomic indicators are reflective of the fact that due to less stringent regional and localised lockdowns the economy relatively was not that adversely affected ie Q1 FY22 GDP was Rs.32.38 lakh crore as against Rs.26.95 lakh crore in Q1FY21.
In Q1FY21, while agricultural sector has shown a growth of 4.52%, there has been a strong rebound in manufacturing and construction. Manufacturing has expanded by 49.63%, while construction has shown a rise by 68.3%. Core sector output grew by 9.4% ie coal, natural gas, refinery products, fertilizers, cement, steel and electricity showed a positive growth while crude oil production declined by 3.2%. With these eight core sectors constituting two fifths of the index of industrial production (IIP) and showing an upward tick, IIP numbers for July 2021 are expected to expand at 13-15%. The silver lining on the wall has been gross fixed capital formation, ie private sector investment which grew at 55.26% in Q1FY22 and constitutes 31.6% of GDP as against 24.4% in Q1FY21, however it is still lower than 34.6% of preCovid Q1FY20. India’s Manufacturing Purchasing Managers Index for July 2021 rose to a three month high of 55.3, thereby denoting an expansion in manufacturing activities.
High frequency indicators for the Indian economy on an average since June 2021 ie post the second virus wave peak in April-May 2021 have been pointing towards an uptick in economic activity thereby moving the economy back on the track of economic recovery. GST collection (in August 2021 crossed Rs. 1 lakh crore for the second month in a row), eway bills, mobility levels, power demand (18.6% increase over last year), auto sales and exports have been on a rise. Not to miss, work generated under the MGNREGA scheme in August 2021 is 58% lower than July 2021 thereby indicating that rural workers are migrating back to urban industrial areas for work.
On the flip side, while the picture on the canvas of economic recovery is appealing, there are certain watch-outs that the Government and RBI need to look out for and keep on its radar. Of the four demand-side growth engines ie. private final consumption expenditure, government final consumption expenditure, gross fixed capital formation and exports, the heavy lifting in Q1FY22 has been done by exports, on the back of the V shaped recovery being witnessed at a global level. With the second virus wave leaving its mark on nearly all households, q-o-q numbers for consumption show that private consumption has contracted 8.9% in Q1FY22 as against the previous quarter, while exports not only grew 7.2% q-o-y but also crossed pre Covid levels. As per the OBICUS survey for Q42021, capacity utilisation (CU) numbers showed that while (CU) had increased to 69.4% as against 66.6% in the previous quarter, it was still not anywhere near 73.6% of Q2, 2019-20. Also, services sector, especially contact intensive and employment generating sectors, tourism and hospitality etc. are continuing to lag. With the pace of vaccinations increasing (as of Sept 1, 2021, 66.35 crore total doses administered, of which 51.10 crore first dose and 15.25 core second dose) and festival season setting in, the anticipation is that there would be a demand revival but not at a rapid pace provided the anticipated third wave comes under control with satisfactory progress in vaccination drive. Improving consumer sentiments especially post the onslaught of the second virus wave will be key to demand recovery and increase discretionary spending.
Agreeably, some more key measures undertaken by the Government in the recent path such as detailing of the Asset Monetisation scheme and amendment to the Retrospective Tax has boosted investor sentiments and will help further drive growth. The roadmap laid out by the Government recently for the asset monetisation pipeline is a welcome step and by unlocking value of unutilized or underutilized public assets and creating of new revenue sources only seek to drive employment opportunities along with balanced regional development. Increased employment will lead to increased income and higher demand. However, successful implementation and efficient execution at the ground level is key and public and private sector must now collaborate effectively to enable creation of infrastructure through monetisation. Also, with the Government doing away with the retrospective tax, it has perked up the interest and attention of foreign and domestic investors. An unambiguous tax regime with transparency being a key component of its basic framework will help attract foreign direct investments into the country and give the requisite push to building of an Atmanirbhar Bharat.
It would only be fair to state that in these trying times of Covid, the Reserve Bank of India (RBI) has undertaken conventional and unconventional stimulus measures and stepped up to its role of being the monetary policy administrator. Even though inflation levels are on the rise, RBI in its monetary policy meeting in August 2021, chose to focus on economic growth over inflation. In its Financial Stability Report, July 2021 the monetary authority had stated that the increasing inflation is transitory in nature and with international commodity prices facing a broad based upswing and global and domestic supply chain facing disruptions the situation would only improve with Covid restrictions being removed and economic activity reviving. However, with inflation being around the upper tolerance level of 6% for sometime now and gross margins of Corporates witnessing a squeeze, it might not be appropriate to consider inflation to be transitory in nature.
With commodity prices being at multi-year all time high levels in FY 21, it has led to increased raw material and input costs for consumer durable, chemical and capital goods sector. An attrition led supply pressure on availability of labour for the technology sector. Increased input costs of raw materials and labour are only adversely impacting gross profit margins of Corporates despite sales levels returning to normalcy. While with current demand constraints, Companies are being forced to absorb increased production costs as of now, and it would only be a matter of time before Corporates pass on the increased costs to consumers, especially, with demand revival taking place due to the festive season. Thus, the RBI and Government probably need to go back to the drawing board and re-strategise for increased commodity prices which might not really be resulting in inflation being transitory as is being presently viewed.
(Dr. Jagadish Shettigar, Professor, Economics, Birla Institute of Management Technology, Greater Noida and former Member of the Prime Minister’s Economic Advisory Council. Dr. Pooja Misra, Associate Professor, Economics, Birla Institute of Management Technology, Greater Noida. Views expressed by the authors are their own.)