RBI sees de­mand re­cov­ery tak­ing more time

The Pak Banker - - FRONT PAGE -

In­dia's cen­tral bank said de­mand in the econ­omy is likely to take more time to mend in the ab­sence of greater fis­cal sup­port, even as the gov­ern­ment is con­strained in its abil­ity to pro­vide more stim­u­lus.

"An as­sess­ment of ag­gre­gate de­mand dur­ing the year so far sug­gests that the shock to con­sump­tion is se­vere," the Re­serve Bank of In­dia said in its an­nual re­port for the year ended June. "It will take quite some time to mend and re­gain the preCovid-19 mo­men­tum."

Pri­vate con­sump­tion has lost its dis­cre­tionary el­e­ments across the board, the cen­tral bank said, while not­ing that trans­port ser­vices, hos­pi­tal­ity, recre­ation and cul­tural ac­tiv­i­ties were par­tic­u­larly af­fected in Asia's econ­omy third-largest econ­omy-where con­sump­tion ac­counts for some 60% of gross do­mes­tic prod­uct.

While In­dia an­nounced 21 tril­lion-ru­pee ($282 bil­lion) worth of mea­sures to sup­port the econ­omy through the virus cri­sis, most of the steps were fo­cused on pro­vid­ing credit sup­port rather than bud­getary as­sis­tance to boost de­mand in the near term.

Both the fed­eral gov­ern­ment as well as the states have much "less fis­cal space to deal with Covid-19 than dur­ing the" global fi­nan­cial cri­sis, ac­cord­ing to the RBI. "The fu­ture path of fis­cal pol­icy is likely to be heav­ily con­di­tioned by the large over­hang of debt and con­tin­gent li­a­bil­i­ties in­curred dur­ing the pan­demic," it added.

Economists in a Bloomberg sur­vey ex­pect the fed­eral gov­ern­ment's bud­get gap to soar to 7.2% of gross do­mes­tic prod­uct, more than dou­ble the tar­get pegged by Fi­nance Min­is­ter Nir­mala Sithara­man in Fe­bru­ary. And along with states, the con­sol­i­dated fis­cal gap is likely to cross 10% of GDP, ac­cord­ing to economists.

While the cen­tral bank re­frained from giv­ing out eco­nomic growth pro­jec­tions in the an­nual re­port as is usual, it cited the In­ter­na­tional Mone­tary Fund and OECD's fore­casts. The IMF sees the

In­dian econ­omy con­tract­ing 4.5% in the fis­cal year to March 2021, while the OECD fore­cast a 7.3% de­cline in the event of a fresh wave of virus cases among the pop­u­la­tion.

Read: In­dia Gets Big­gest GDP Down­grade by IMF as Lock­down Hurts

The RBI said high-fre­quency in­di­ca­tors have so far pointed to a "re­trench­ment in ac­tiv­ity that is un­prece­dented in his­tory." More­over, re­sump­tion of ac­tiv­ity in May and June af­ter the lock­down was eased in parts of the coun­try ap­peared to have lost mo­men­tum in July and Au­gust, mainly due to reim­po­si­tion of stricter curbs by many states. That sug­gests that con­trac­tion in eco­nomic ac­tiv­ity will pro­long into the July to Sep­tem­ber quar­ter, the RBI said.

While the cen­tral bank ex­pects gov­ern­ment con­sump­tion to un­der­pin de­mand for now, it sees nondis­cre­tionary spend­ing lead­ing the way go­ing for­ward as mil­lions of house­holds are grap­pling with job losses and wage cuts, forc­ing them to spend only on es­sen­tials like food.

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