The Monetary Policy Committee (MPC) of the Reserve Bank of India has decided to keep official interest rates unchanged while maintaining an accommodative stance. He also believes that the economy is already out of the contraction zone and will register positive growth in the quarters ending in December (0.1%) and March (0.7%). This means that the Indian economy has bottomed out from its pandemic impact. The fact that MPC expects the annual contraction of GDP in 2020-21 to be 7.5% and not 9.5%, a figure it projected at its October meeting shows that the recovery has been faster than expected. . However, the evidence from the latest RBI forward-looking surveys also shows that the possibility of a slowdown in the ongoing recovery cannot be ruled out. MPC’s assessment also indicates that the nature of the challenge facing the economy may actually be shifting from the immediate task of ensuring the economy is unlocked. Here are four things worth keeping in mind when looking at the economy going forward.
1 Base effect will make growth rate figures a bit misleading going forward
The Indian economy was losing growth momentum even before the pandemic caused a huge disruption to economic activity. GDP growth was 8.2% in March 2018. It fell continuously in all quarters through June 2020, except March 2019. GDP growth was 4.1% in the quarter ending December 2019 and only 3.1% in March 2020. The June and September quarters have seen an annual contraction of GDP. In the future, this will have a favorable base effect on GDP growth rates.
This means that disproportionately higher growth rates do not have to mean that the economy is increasing its historical revenues at a very rapid rate. For example, even with a growth rate of 25% in the quarter ending June 2021, the absolute level of GDP would still be lower than the June 2019 level.
2 Consumer confidence surveys show uneven recovery
While the overall economy is assumed to be outside the contraction zone, this has not translated into an increase in income for the majority of the population. The latest Consumer Confidence Survey (CCS), which was conducted in the first half of November, shows that more than half of those surveyed continue to report a drop in income and employment.
While perceptions of the general economic situation and employment appear to have bottomed out, income and non-essential expenses have fallen compared to September levels. This suggests that the ongoing economic recovery is being driven by a small part of the economy. Experts have been talking about the current economic recovery being led by earnings rather than wages, which could restrain massive demand in the future. CCS certainly takes place in urban centers and does not capture the mood in rural areas, and by all accounts, agriculture is doing well.
3 Inflation goes beyond food
MPC has taken a note of caution on the inflation situation, which has started to leak out of food. A good winter harvest may not be enough to reduce food inflation, which has entered double-digit growth since September.
“While grain prices may continue to decline with the arrival of the bumper kharif harvest and vegetable prices may decline with the winter harvest, other food prices are likely to remain high,” said the MPC resolution. Rising food prices will continue to put pressure on household budgets and negatively affect non-food demand. Data from the consumer price index (CPI) show that core inflation, the non-food and non-fuel component of the CPI basket, has risen steadily in recent months alongside food inflation.
As international crude oil prices are consolidating in anticipation of a global revival in demand, the government may have to reconsider its high taxes on petroleum products as well. Brent crude prices ($ 48.7 / barrel on December 3) have recovered their March levels.
4 Will credit growth rebound?
Many experts believe that the better-than-expected performance in the September quarter was the result of a favorable confluence of stifled demand and holiday demand. Speaking at the Hindustan Times Leadership Summit, Finance Minister Nirmala Sitharaman said that while these factors could have played a role in the economic recovery, companies have started planning new investments and the recovery will gain more momentum.
A good way to check if this is happening would be to track the demand for non-food credit in the economy. The latest data from the Indian Economy Monitoring Center shows that non-food credit growth appears to have bottomed out and has started to recover in November after falling for a long time. If this recovery continues in the future, it could be an early indicator of a revival in business sentiment and perhaps investment demand.
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