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Consumption shock severe, economic recovery will take longer, poorest hit the hardest: RBI

“Private consumption has lost its discretionary elements across the board, particularly transport services, hospitality, recreation and cultural activities,” the RBI said in its Annual Report for 2019-20.

Written by George Mathew | Mumbai |
Updated: August 26, 2020 11:16:57 am
Indian Economy Covid-19, coronavirus Indian Economy, RBI Indian economy, economy recovery, RBI Annual report 2019-20, Urban consumption Covid-19, covid-19 indian economy slowdownThe RBI also cautioned about the loss of recovery momentum since June, with states imposing localised lockdowns.

The Reserve Bank of India (RBI) Tuesday indicated that the economy which is expected to contract for the first time ever, will take “quite some time to mend and regain” the pre-Covid momentum, as the “shock to consumption is severe” and the “poorest have been hit the hardest”.

The RBI also cautioned about the loss of recovery momentum since June, with states imposing localised lockdowns. “The upticks that became visible in May and June after the lockdown was eased in several parts of the country, appear to have lost strength in July and August, mainly due to reimposition or stricter imposition of lockdowns, suggesting that contraction in economic activity will likely prolong into the second quarter,” the RBI said.

According to the RBI, private consumption is expected to lead the recovery when it takes hold, and government consumption is expected to continue pandemic-proofing of demand. “Private consumption has lost its discretionary elements across the board, particularly transport services, hospitality, recreation and cultural activities,” the RBI said in its Annual Report for 2019-20.

Read | Firms used tax cut to pare debt, need govt spending: RBI annual report

The RBI said the recovery will happen when the non-discretionary spending — expenses that people cannot do without, such as food and rent — leads the way, with a durable increase in disposable incomes enabling discretionary spending like vacation and entertainment.

The central bank has warned that high frequency indicators so far point to a retrenchment in activity that is unprecedented in history. Rating agencies and analysts have forecast a contraction of up to 20 per cent in the GDP in the first quarter of 2020-21 due to the lockdown induced by the Covid-19 pandemic.

Explained

Recovery to be slow, painful

The optimism from upticks in May-June that recovery will be fast in the second quarter has faded. Several states extended lockdown in July-August and shut down economic activities — this will delay a rebound.

The RBI injected close to Rs 10 lakh crore since March into the markets and slashed repo rate — the key policy rate — by 115 basis points to 4 per cent to revive growth and stabilise the financial system.

Indian Economy Covid-19, coronavirus Indian Economy, RBI Indian economy, economy recovery, RBI Annual report 2019-20, Urban consumption Covid-19, covid-19 indian economy slowdown In July, however, moderation set in, with retail and recreation mobility stagnant, and some slide in people’s movement around groceries and pharmacies, it said.

The Reserve Bank’s survey for July has indicated that consumer confidence fell to an all-time low, with a majority of respondents reporting pessimism relating to the general economic situation, employment, inflation and income. However, respondents indicated expectations of recovery for the year ahead, the RBI said.

Read | Central bank balance sheet up 30%, income declines 29%

According to the central bank, the pandemic has also exposed new inequities — white collar employees can work from home while essential workers have to work on site, exposed to the risk of getting infected. In some areas of work such as hospitality, hotels and restaurants, airlines and tourism, employment losses are more severe than in other areas. “The poorest have been hit the hardest,” it said.

Urban consumption demand has suffered a bigger blow – passenger vehicle sales and supply of consumer durables in the first quarter of 2020-21 have dropped to a fifth and a third, respectively, of their level a year ago. Air passenger traffic has ground to a halt. Rural demand, by contrast, has fared better.

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Listing examples of the slowdown in the recovery, the RBI said the total e-way bills issuance, an indicator of domestic trading activity, increased by 70.3 per cent in June 2020 on a month-on-month basis. In July, however, it increased by only 11.4 per cent and remained 7.3 per cent lower than a year ago. During June 2020, inter-state e-way bills had increased by 91.3 per cent, but in July they rose only by 15.3 per cent. Similarly, intrastate e-way bills, which had risen by 60.1 per cent (month-on-month) in June, increased only by 9.1 per cent in July.

Google mobility trend, which tracks movement of people as a reflection of underlying economic activity, picked up in June 2020 from its levels in April and May. Mobility around groceries and pharmacies reached pre-Covid levels, while mobility relating to retail and recreation was around 60.0 per cent and transit activity was 40.0 per cent lower than that of February 2020 levels, the RBI said.

In July, however, moderation set in, with retail and recreation mobility stagnant, and some slide in people’s movement around groceries and pharmacies, it said.

The RBI report said headline inflation may remain elevated in Q2:2020-21 but may moderate during H2:2020- 21 aided by large favourable base effects. Retail inflation was at 6.93 per cent in July, above the upper tolerance limit of 6 per cent (4 per cent target plus 2 per cent).

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