India’s economy may have grown 22.1% in Q1, but demand is still low: RBI

By Administrator_India

Capital Sands

The tapering of the second Covid-19 wave, coupled with an aggressive vaccination push, has brightened the near-term prospects for the Indian economy, and real gross domestic product (GDP) growth is estimated at 22.1 per cent in the April-June quarter, the Reserve Bank of India (RBI) said in its July bulletin on Thursday.

“A solid increase in aggregate demand is yet to take shape. Even with a 9.5 per cent GDP growth in 2020-21, there will be substantial slack in the economy and demand pressures may take some more time to become evident,” the central bank warned in the article titled State of the Economy.

“On the supply side, agricultural conditions are turning buoyant with the revival in the monsoon, but the recovery of manufacturing and services sectors has been interrupted by the second wave,” it said.

The RBI said a pick-up in inflation was driven largely by adverse supply shocks, such as in the case of protein-rich food items, edible oils and pulses, and sector-specific demand-supply mismatches caused by the pandemic. “These factors should ease over the year as supply side measures take effect,” it said.

Even as inflation remained above the RBI’s tolerance band during June-November 2020 and again moved above the upper threshold of 6 per cent in May and June 2021, the sense now is that “inflation will persist at these elevated levels for some months before easing in the third quarter of 2021-22 when the kharif harvest arrives in markets”.

Steps have been taken to address specific supply-side measures, “but more needs to be done”, the report said.

Coming to the pandemic itself, the report said a mathematical model had suggested that in the best and normal course, the third wave could just be a ripple and life would return to normalcy by August. However, in its pessimistic scenario, which assumes that a new 25 per cent more infectious virus other than Delta+ spreads in August, there will be a bigger impact.

“If there is no such mutant, the third wave will be a ripple and comparable to the first. If there is an immunity-escape mutant, however, all the above scenarios will be invalid,” it said. Meanwhile, a lull in infections should be taken as an opportunity to be seized to prepare for a possible third wave, it added.

condition, though, should improve, as is evident from strong sets of data coming from various sectors. These include e-way bills, freight, electricity generation, and housing. The Google mobility index is now above the same period last year as states ease the lockdowns in phases, it said.

Two-thirds of net foreign capital inflows received by India during the fourth quarter of the last fiscal were absorbed domestically, instead of passively adding back to reserves. Foreign exchange reserves reached an all-time high of $610 billion on July 2, equivalent to 18.4 months of 2020-21 imports.

“The pick-up in the investment rate, if sustained, will improve the outlook for India’s potential output and as a result, the nation’s external solvency. The resilience of remittances in the face of the pandemic also augurs well for the prospects for gross disposable income and hence domestic consumption,” the report said. “Aggregate demand conditions are recovering, spurred by unlock measures and the pace of vaccination.”

Internationally, though, a couple of concerns have emerged, pushing up inflation. For example, freight rates have risen more than five times in recent times. The report also pointed out a sharp rise in domestic fuel prices, which is also pushing up kerosine and cooking gas prices.

The report also touched upon the volatility in the bond market globally, including in India. “At stake for markets is the orderly evolution of financial prices. At stake for central banks is the weak economy which would not be able to withstand liquidity and rate tightening in its current state of health, and the fragile recovery that is being painstakingly scripted could be at risk.”

Central banks have put their inflation credibility on the line, “challenging the market’s view by renewing their commitment to stay accommodative or to undertake a very gradual, multi-year adjustment. The key, as in the rest of life, is to strike the right balance,” it said.