The Annual Report of the Reserve Bank of India, released on Tuesday, affirms that the recovery from the current crisis will be a painful and protracted process. While leading economic indicators do suggest that the economy has bounced back from the lows observed in April, the report corroborates the view that economic activities are plateauing at lower levels, and that the normalisation of activities to pre-COVID levels is unlikely in the near-term. “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,” it noted. This implies that though the pace of contraction in activities does appear to have eased considerably since the easing of the lockdown restrictions, the central bank now expects the economy to continue to contract in the second quarter of the current financial year as well.
The report offers a grim prognosis of the underlying drivers of growth. On the consumption side, the data points to a remarkable decline in household financial liabilities, indicating that in line with the corporate sector, households in India have also begun to deleverage. Household financial liabilities fell to 2.9 per cent of gross national disposable income (GNDI) in 2019-20, from 4 per cent in 2018-19. And this was before the COVID-19 pandemic struck. Rising income uncertainty stemming from the subsequent job and income losses may well have accelerated this trend, and led to a rise in precautionary savings, dimming the prospects of a revival in private consumption in the near term. As the report notes, “An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum.” On the investment side, the prospects of a pick-up in the private sector capex cycle also appear to be bleak. Companies have utilised the cash flow freed up due to the reduction in the corporate tax rates to meet their loan obligations, and to build up their cash reserves, indicating limited appetite for launching fresh investment. A risk averse household and corporate sector, both in the midst of a deleveraging exercise, underscore the need for greater public sector spending to revive the economy. As the RBI also notes, public investment funded by the monetisation of assets, could “revive and crowd in private investment.”
The central bank’s continued reluctance to provide any estimate of economic growth for this year underlines the lingering uncertainty. While the National Statistics Office (NSO) will release its estimates of growth for the first quarter, indicating the extent of the slump during the period, early next week, surely the RBI should provide its own assessment of the economy, and how it sees economic activity shaping up over the medium term, to help guide policy-makers on the future course of action.