Indian economy is recovering faster than expected and may post minor positive growth in the third quarter, but efforts need to be redoubled to fight inflation so that it doesn’t hurt the incipient growth impulses, according to the State of the Economy report in the December Bulletin of the Reserve Bank of India (RBI).
“Indian economy is pulling out of Covid-19’s deep abyss and is reflating at a pace that beats most predictions,” the report said. Although there are headwinds, “steadfast efforts by all stakeholders could put India on a faster growth trajectory,” the report said.
The National Statistical Office’s (NSO) end-November release showed that the Covid-19 pandemic imposed retrenchment of the first quarter was much shallower in the second quarter and the economy was reflating at a pace that beats most predictions. RBI’s nowcasting model also shows that the economy will post a positive economic growth rate of 0.1 per cent in the third quarter. The fourth bi-monthly monetary policy in December also projected economic growth to be 200 basis points higher than what it had predicted in October. It said the Indian economy will clock a growth rate of 14.2 per cent in the first half of 2021-22 on top of 0.4 per cent in the second half of 2020-21.
“Contractions forecast by various agencies for the year as a whole are being trimmed, and if the current momentum is maintained, the bounce back expected in the last quarter of the year may be stronger than postulated under baseline assumptions,” the RBI said.
During the Covid-19 pandemic, financial savings of households and corporations have risen, “waiting to be intermediated into productive investments rather than passive holdings of Statutory Liquidity Ratio (SLR) and non-SLR paper.” With economic activities turning around, bank credit is slowly gaining traction.
Therefore, with the policy emphasis now shifting towards the more durable drivers of the economy, private investment should turn its focus away from precautionary and deleveraging considerations “to capex, capacity utilisation and building of new capacities,” the report said.
Although total merchandise exports at $23.5 billion declined 8.7 per cent y-o-y in November, non-oil exports maintained pre-Covid-19 levels for the third consecutive month. Sectors like drugs and pharmaceuticals, agriculture, pharmaceuticals and iron ore showed resilience, while imports declined for the ninth successive month though the pace of contraction is moderating. Oil imports declined 43.4 per cent in November 2020 mainly due to soft international crude prices. But in a sign that demand is getting back in the economy, non-oil imports have returned broadly to pre-Covid levels, the RBI said.
The return of demand, though, is putting some pressure on the inflation front. “A combination of rising international commodity prices and increasing pass-through to domestic manufactured goods and services prices, firms striving to recoup lost incomes by raising margins, and demand normalising is adding to core inflation pressures,” the RBI said.
“Efforts need to be redoubled to excoriate the ‘worm in the apple’ – inflation – before it hurts the impulses of growth that are taking root. Efficient, effective and timely supply management, including checking runaway retailer margins and reducing the incidence of indirect taxes on consumers, can break the back of the inflation pressures before they incipiently broaden and work against the intent of fiscal and monetary stimuli,” the RBI said.
Since September, India has managed to flatten the Covid-19 infection curve, barring some localised flare ups. The recovery rate is close to 95 per cent, and vaccine developments are at an advanced stage. Calibrated stimulus measures have also managed to support investment and consumption demand, according to the report.
“On the whole, the above-the-line fiscal stimulus will likely boost growth by close to 2 per cent of GDP (gross domestic product) in 2020-21. In other words, it is prudent to look beyond the volatility inherent in high frequency indicators,” it said.
The 12 month forward earnings estimate for most companies reveals improvement in outlook. Sectors such as auto and capital goods, which had been hit hard by the lockdown are expecting a turnaround in forward earnings. Healthcare, information technology (IT) and fast-moving consumer goods (FMCG) companies are sighting stronger earnings outlook.
“Moreover, intrinsic strength in the manufacturing and services sectors is being built as debt servicing capacity is getting reinforced and leverage is being brought down. India’s farm sector is also forging ahead, backed by pathbreaking marketing reforms,” the report said.
Liquidity conditions remain comfortable, and banks have returned Rs 37,348 crore of funds taken under long-term repo operations (LTRO) and targeted long term repo operations in favour of cheaper on-tap TLTRO.