Economy to shrink in Q2, says RBI report

Shock to consumption has been severe; govt. consumption key to demand revival.

August 25, 2020 04:48 pm | Updated November 28, 2021 12:57 pm IST - Mumbai:

A logo of RBI. File.

A logo of RBI. File.

The Reserve Bank of India (RBI) foresees the economic contraction triggered by the COVID-19 pandemic extending into the second quarter especially as the shock to consumption has been severe, and said government consumption would be key to the revival of demand.

“High frequency indicators that have arrived so far point to a retrenchment in activity that is unprecedented in history,” the RBI said in its Annual Report for 2019-20, released on Tuesday.

 

“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,” it added.

Citing data including the total issuance of e-way bills, a marker of domestic trading activity, as reflecting the loss of momentum in July, the central bank said its survey for the month of July 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.

“Going forward, government consumption is expected to continue pandemic-proofing of demand, and private consumption is expected to lead the recovery when it takes hold, with non-discretionary spending leading the way until a durable increase in disposable incomes enables discretionary spending to catch up,” the RBI noted.

 

“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.”

Observing that private consumption had lost its discretionary elements across the board, particularly in transport services, hospitality, recreation and cultural activities, the central bank said, “Behavioural restraints may prevent the normalisation of demand for these activities.”

“Urban consumption demand has suffered a bigger blow, passenger vehicle sales and supply of consumer durables in Q1: 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,” the RBI said.

Stating that rural demand, by contrast, had fared better, the RBI report said among underlying indicators, tractor sales picked up by 38.5% in July, spurred by the robust pace of kharif sowing, while the contraction in motorcycle sales eased in July.

The central bank said a fuller recovery in rural demand was, however, being held back by muted wage growth, which was still hostage to the migrant crisis and associated employment losses.

The RBI said the Monetary Policy Committee (MPC) expected headline inflation to remain elevated in the second quarter of the current fiscal, but likely to ease in the second half, aided by favourable base effects.

 

“The MPC expected real GDP growth for the year 2020-21 as a whole to be negative,” it said.

The MPC was conscious of the upside risks to its medium-term inflation target, the central bank added.

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