RBI’S reading of the economy
It is right that 2020 was worse. But recovery will be hard, and a stimulus will be needed
The Reserve Bank of India (RBI) has said, in its monthly bulletin released on May 17, that “the biggest toll” of the ongoing second wave of Covid-19 is “demand shock”. It listed other negatives — “loss of mobility, discretionary spending and employment, besides inventory accumulation” — but emphasised that “aggregate supply is less impacted”. Perhaps because of this, RBI concluded that “the resurgence of Covid-19 has dented but not debilitated economic activity in the first half of 2021-22” and that the economy hasn’t been as badly hit as it was last year (the central bank has added the caveat that this is a tentative assessment).
RBI is partly right. Last year, during the first wave, the 68-day lockdown and the subsequent graded (and gradual) easing of more restrictions meant a significant disruption in supply. This year, the Union government, burnt from its experience last year, has steered clear of announcing a national lockdown, leaving it to the states to impose localised lockdowns. Many states did resort to these measures in April as the second wave threatened to overwhelm their health systems, but ensured that there would not be too much of a disruption in industrial activities. The Nomura India Business Resumption Index for the week ended May 16 was 61.9 (100 indicates a prepandemic level of activity), a sharp fall from February, when it almost reached pre-pandemic levels. This level was last seen in June 2020, after the hard lockdown ended and industrial activities started resuming. It may fall again this week and next, with many states expected to extend lockdowns as the second wave shows the first signs of ebbing, but it is unlikely it will go down to the levels of around 45 seen last April.
But it may be a bit of a stretch to expect to see the same sort of pent-up consumption witnessed last year. Unlike the first wave, the crippling second one has touched many middle-class households in terms of loss of lives or severe illnesses that required extensive and expensive medical treatment. And anecdotally, both businesses and individuals expect their immediate prospects to be muted. Sentiment, both individual and business, has taken a beating. If the Indian economy has to bounce back by the third quarter of this fiscal (the second may be too soon), a proper fiscal stimulus may be called for. RBI’S confidence, while reassuring, may well be misplaced.