This Article is From Aug 26, 2020

Covid Shock To Consumption Severe, Demand Recovery Will Take Time: RBI

RBI said that 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.

Covid Shock To Consumption Severe, Demand Recovery Will Take Time: RBI

Private consumption has lost its discretionary elements across the board, the central bank said.

Highlights

  • Private consumption has lost its discretionary elements across the board
  • The government is constrained in its ability to provide more stimulus
  • Transport, hospitality, recreation and cultural activities took a hit

Reserve Bank of India 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 pre-Covid-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 third-largest economy -- where consumption accounts for some 60 per cent of gross domestic product.

While India announced Rs 21 trillion ($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 central 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 central government's budget gap to soar to 7.2 per cent 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 per cent of GDP, according to economists.

Turning Positive

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 per cent in the fiscal year to March 2021, while the OECD forecast a 7.3 per cent decline in the event of a fresh wave of virus cases among the population.

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 re-imposition of stricter curbs by many states. That suggests that contraction in economic activity will prolong into the July to September quarter, the RBI said.

India's output gap may have widened to as much as -12 per cent of its potential in April when the economy ground to a halt under one of the world's tightest lockdowns to contain the virus, according to estimates by RBI staff. As a result, the April-June period is likely to see the economy shrinking at its fastest pace, before gradually recovering and turning positive in the January-to-March quarter.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)