‘Omicron more of a flash flood than a wave, lifting prospects’

Overall economic activity strong, RBI officials say in bulletin

Updated - January 18, 2022 01:55 am IST

Published - January 17, 2022 10:57 pm IST - Mumbai

Overall economic activity in India remains strong, with upbeat consumer and business confidence and uptick in several incoming high-frequency indicators, despite the outbreak of the Omicron variant of the virus causing COVID-19, Reserve Bank of India officials wrote in an article in the RBI Bulletin.

“As the world stepped into the new year, the path of the recovery in India as in the rest of the global economy encountered headwinds from a rapid surge in infections due to Omicron. Nonetheless, amidst upbeat consumer and business confidence and an uptick in bank credit, aggregate demand conditions stay resilient, while on the supply front, Rabi sowing has exceeded last year’s level and the normal acreage,” the article’s authors, led by deputy governor Michael Debabrata Patra, wrote.

Noting that manufacturing and several categories of services remained in expansion mode, they said, “More recently, expectations that Omicron may turn out to be more of a flash flood than a wave have brightened near-term prospects”. Recent data from the U.K. and South Africa suggested that Omicron infections were 66-80% less severe, with a lower need for hospitalisation.

“This has brightened near-term prospects and financial markets reflect this optimism,” the officials wrote in the article titled ‘State of the Economy.’

Aggregate supply, as measured by gross value added (GVA) at basic prices, is set to rise 8.6% in FY22, as per the first advance estimates, as against a contraction of 6.2% the previous year. The acceleration in GVA was facilitated by robust growth in agriculture, coupled with recovery in industry and in several constituents of services, albeit on a favourable base, they observed.

After the all-time high monthly trade deficit of $22.9 billion in November, the deficit eased to $21.7 billion last month.

They said the Centre’s fiscal position continued to witness improvement, with net tax revenues touching an all-time high of 73.5% of budget estimates (BE) and the gross fiscal deficit plummeting to 46.2% of BE during April-November 2021, as against the five-year average of 50.6% and 112.5% respectively.

Highlighting that aggregate demand conditions had stayed resilient they pointed out that the issuance of e-way bills — an indicator of freight movement — surged to 7.2 crore in December, the second highest ever.

“This is indicative of the likelihood of robust collection of the goods and services tax (GST) in January 2022. With a strong pick-up in manufacturing and construction, highway toll collections soared by 16% month- on-month (m-o-m) in December. Power consumption rose by 4.5% to 110.3 billion units in December,” they said.

In contrast, the global outlook remained clouded by considerable uncertainty, the authors highlighted. “Inflation continues to mount across geographies amidst disruptions in production, supply chains and transportation. Consequently, the divergence between monetary policy stances across jurisdictions has widened.”

“There are indications that supply-chain disruptions and shipping costs are slowly easing, although the waning of inflation may take longer,” they added.

This provides a window of opportunity to focus all energies on accelerating and broadening the global recovery, the authors pointed out in the bulletin.

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