Michael Patra, a member of the RBI’s monetary policy committee, said that it may take years for India’s GDP to regain production lost due to the coronavirus pandemic.
Patra’s statement is part of the MPC minutes released by the central bank from the October 7-9 meeting.
“If the projections hold up, the level of GDP would have fallen about 6 percent below its pre-COVID level by the end of 2020-21 and it may take years to recover this lost output. There is also an anecdotal sense that the economy potential production has fallen and the post-COVID growth trajectory will be very different from what has been recorded so far. Changes in social behavior and trade and labor engagement standards may accentuate this structural change, “said Patra.
Maintaining the status quo for the second time in a row, the Reserve Bank of India decided to keep the benchmark interest rate unchanged at 4%, but maintained an accommodative stance, implying further rate cuts in the future should it arise. the need to support the economy hit by the COVID-19 crisis.
“The COVID curve is arching inward, from cities where infections have been infected so far, to inland regions. Fears of a second wave are looming over India; it has already forced closures in Europe, Israel and Indonesia, and India, second highest Infection case burden and overloaded healthcare infrastructure cannot be immune. In the absence of intrinsic factors, recovery may last only until pent-up demand has been sated and demand is complete. Stock replenishment. Empirical evidence suggests that consumption-led recoveries are superficial and short-lived. Exports could be a driver, but with the latest WTO projection of a decline in world trade volume by 9, 2 percent in 2020, the role of exports in driving a lasting revival is likely to be limited, “Patra further said at the MPC meeting. .
Structural reforms are needed to unlock growth impulses, but they may lack social traction in an atmosphere of depressed growth and jobs and high uncertainty, Patra said in her forecast of the economy.
“In the current environment, however, both monetary policy and fiscal policy in India face increasing constraints, some idiosyncratic. For fiscal policy, it is the collapse of tax revenue, by 32% in the first quarter. Consequently, the center’s income deficit during April-August is 121.9% of the budget estimates. For monetary policy, it is the persistence of headline inflation above 6% for the third consecutive month. Reforms are needed structural to unlock growth impulses, but they may lack social traction in an atmosphere of depressed growth and employment, and high uncertainty, “he said.
Jayanth R. Varma, another MPC member, said: “In a world that is full of unpleasant surprises, the MPC must necessarily be data-driven. Covid-19 was an example of a totally unexpected growth shock that came out of nowhere. If if an equally unpredictable inflation shock were to hit the economy, I find it hard to believe that the MPC will remain accommodative.
“I think excessively high long-term rates are causing damage to the economy in two ways. First, a significant part of the easing of monetary policy rates is not being passed on to the long-term rates that make up the point. benchmark for corporate lending and investment decisions. Long-term rates exacerbate the collapse of investments in the economy. Second, high long-term rates cause an appreciation of the real effective exchange rate by stimulating investment inflows. foreign capital in our bond markets at a time when the investment collapse has caused the current account to swing into surplus, “added Varma.
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