Charting recovery: The economy may bounce back quickly

November 10, 2020 6:30 AM

Smart implementation of the government’s proposals, together with RBI’s accommodative monetary policy, could revive the economy faster than expected

However, sectors like travel, tourism, hospitality, entertainment, live sports, logistics, events & conferences, fashion, real estate, etc. will take considerable time to normalise.However, sectors like travel, tourism, hospitality, entertainment, live sports, logistics, events & conferences, fashion, real estate, etc. will take considerable time to normalise.

By Barendra Kumar Bhoi
India has been one of the worst sufferers due to the Covid-19 pandemic. Even if the nation-wide lockdown has been lifted in a phased manner, local lockdown persists in many states. Finally, the Covid-positive curve has started flattening in India. Nevertheless, the medical emergency is far from over. The possibility of a second wave, during the upcoming festival season, cannot be ruled out. Complete normalcy of economic activities will not be possible until an effective vaccine/therapy is found/administered. The experience of striking a balance between life and livelihood has been challenging. The resumption of economic activities seems to have slowed down a bit recently as the fear factor still reigns high in the minds of many people.

Optimists believe that the Indian economy will bounce back quickly. By end-October, the economic activity has recovered to 83% of the pre-Covid level. The contactless economy has recovered rapidly. However, sectors like travel, tourism, hospitality, entertainment, live sports, logistics, events & conferences, fashion, real estate, etc. will take considerable time to normalise.

The Reserve Bank of India (RBI) in its October 2020 monetary policy has indicated a three-speed economic recovery in India. After a gap of six months, RBI has provided projections of growth and inflation in India in FY21.
According to RBI’s projection, India’s real GDP is likely to contract by 9.5% in FY21 with the balance of risks tilted to the downside. Due to strict lockdown observed in India, contraction of real GDP in Q1 of FY21 was 23.9%–one of the highest in the world.

It is clear from the table that the worst is behind us, and the contraction of real GDP may progressively decline going forward. RBI predicts that the real GDP growth is likely to be marginally positive in the last quarter of this year. Given the downside risks, one cannot be very sure whether full normalcy could be restored in the Q4 of FY21 unless local lockdowns are fully lifted.

The current retail inflation outlook has been well above RBI’s maximum tolerance limit of 6% (7.3% in September). Food inflation was in double-digit (10.7% in September). This has been mainly due to unprecedented disruption in the supply chains. Inflationary pressures are expected to abate going forward due to the record level of farm harvest anticipated this year. Being a supply-side problem, RBI has indicated to see-through the temporary rise in food prices. Moreover, the government has waived RBI’s accountability of price rise during the Q1 of this year, which was mainly due to lockdown conditions.

IMF, in its October World Economic Outlook (WEO), has projected a double-digit (10.3%) contraction of India’s real GDP in FY21. IMF’s projection is similar to the double-digit contraction projected by several other agencies/think tanks such as NCAER (-12.6%), SBI (-10.6), Nomura (-10.8), etc.

Both the government and RBI have taken several innovative measures to arrest economic contraction. As India is facing the worst ever contraction of GDP this year, the fiscal consolidation has been set aside for the time being. To maintain government expenditure, the government’s market borrowing programme has been increased from Rs 5.4 trillion in the budget to Rs 12 trillion.

Despite the massive shortfalls of revenue and non-realisation of disinvestment, the government will not only match the expenditure proposed in the budget but may surpass the same. However, the fiscal space is limited. Proposal to borrow an additional amount of about Rs 1.1 trillion from the market to compensate the states due to GST shortfall has been negatively received by the stock market, with BSE Sensex crashing by more than 1,000 points on October 15. There is also the fear of India’s sovereign rating downgrade, which currently stands at the lowest level of investment grade.

The government had announced the Atmanirbhar package of about Rs 21 trillion in May, including the RBI’s liquidity injection of Rs 8 trillion. The package has three components—relief, rehabilitation, and structural reforms. Poor people have benefited from the distribution of food grains stored in the FCI, besides direct benefit transfers. The informal sector of the economy was the worst hit due to lockdown. Atmanirbhar package includes several proposals to protect employment in the informal sector, including Rs 3 trillion low-cost loans to MSMEs with a government guarantee.

There is a dynamic shift in the focus of the government to develop India’s rural areas. Several structural reforms have been proposed for revamping the agricultural marketing, rural infrastructure, food processing, animal husbandry, herbal cultivation, etc. Sooner or later farm income may double due to historic steps taken by the government by amending three acts relating to agri-trade, contract farming, and essential commodities.

RBI’s initiatives have so far been exemplary. Besides repo rate cuts of 115 basis points since February, the RBI has injected more than Rs 11 trillion into the market via several means, like long-term repo operation (LTRO), targeted/on-tap LTRO (TLTRO), Open Market Operations (OMOs), purchase of foreign exchange, reduction in Cash Reserve Ratio (CRR), exemption of Statutory Liquidity Ratio (SLR), special refinance to NABARD, SIDBI, NHB, and Exim Bank, liquidity facility for mutual funds, higher ways and means advance to Centre/States, etc. Moreover, several regulatory forbearances have been given to both borrowers and lenders such as a moratorium on loan/EMI repayments, change in risk weight/loan-to-value ratio, increase in held-to-maturity of SLR bonds, etc.

Smart implementation of government proposals together with RBI’s accommodative monetary policy may revive the economy faster than expected provided medical emergency due to Covid-19 is handled effectively.


Former principal adviser and head, Monetary Policy Department, Reserve Bank of India. Views are personal

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