With the Indian economy pulling out of the Covid pandemic’s “deep abyss”, the real GDP is expected to break out into positive territory with a slender growth of 0.1 per cent in October-December 2020 (Q3), and rise marginally to 0.7 per cent in January-March 2021 (Q4), according to an RBI study on the ‘State of the Economy’.
An update of the economic activity index (EAI) in RBI’s nowcasting assessment exercise further shows that in the first half of 2021-22, the economy will clock a growth rate of 14.2 per cent on top of the 0.4 per cent growth rate in the second half of 2020-21.
“Over the month gone by, more evidence has been turned in to show that the Indian economy is breaking out amidst winter’s lengthening shadows towards a place in the sunlight,” the study said. The economy dipped by a record 23.9 per cent in the June quarter but the contraction narrowed down to 7.5 per cent in the September quarter.
The National Statistical Office’s (NSO) end-November release delivered a pleasant surprise – the pandemic-imposed retrenchment of Q1 of 2020-21 turned out to be much shallower in Q2 and the economy is reflating at a pace that beats most predictions, it said.
Two factors are blessing this turning of the page: one, a bending of the Covid infection curve, and second, a ‘method’ to the stimulus which started with liquidity/ guarantee and cash/ kind support to the economy, which is now transiting in a calibrated fashion to support investment and consumption demand.
The RBI paper said the fourth bi-monthly resolution of the monetary policy committee (MPC) did maintain status quo on the policy rate and stance, but a powerful message was conveyed: growth projections were revised upwards by 200 basis points from October. If they hold, 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, the study said.
On the whole, the above-the-line fiscal stimulus will likely boost growth by close to 2 per cent of GDP in 2020-21. In other words, it is prudent to look beyond the volatility inherent in high frequency indicators, the RBI said. “Companies are doing so already – an analysis of 12-months ahead forward earnings reveals improvement in the outlook for a large number of companies,” it said.
Going forward, in the second half of 2020-21, while the fisc is likely to benefit from better receipts in line with normalisation of economic activity, the push given through various expenditure measures by the Government, essentially on-budget ones through AtmaNirbhar 2.0 and 3.0 is likely to materialise, the RBI study said.
Gross fiscal deficit to GDP ratio is likely to moderate from 14.5 per cent of GDP in the first half of 2020-21 to 10.4 per cent of GDP in the second half of 2020-21, the RBI said. Taking into account these developments and assuming major expenditure push – partly in Q3 and mostly in Q4, based on GDP growth as projected in the Reserve Bank’s December 2020 monetary policy review, the Q3 and Q4 combined fiscal deficit are projected at 8.3 and 12.4 per cent of GDP, respectively, with corresponding 50 per cent confidence interval estimated at 7.8-8.8 per cent and 11.6-12.9 per cent, it said.
The build-up of combined fiscal deficit in H1:2020-21 is sharper, but attributable mostly to the developments in Q1. Going forward, with the severest impact of Covid on government finances already realised in Q1, there is scope for Centre and states to continue with the counter-cyclical fiscal support, which is necessary to sustain the momentum of recovery, the RBI study said.
The average GFD for the states that made post-outbreak budget presentations is 4.6 per cent of GSDP vis-a-vis 2.4 per cent for states presenting their budget before the outbreak of the pandemic. In Q1 and Q2 of 2020-21, the fiscal deficit for states was at 5.0 per cent and 2.5 per cent of quarterly GDP, respectively, much higher compared to previous years, it said.
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