RBI ‘cautiously optimistic’ about economic recovery after Covid-19 second wave

17 Jun 2021 Evaluate

The Reserve Bank of India (RBI) in its ‘State of the Economy’ report June bulletin has said that it sees reasons to be cautiously optimistic as the second wave of the pandemic seems to have hit domestic demand, while other economic indicators show the economy is coming back on stream. It stated while the Indian economy continued to wrestle with the second wave of the pandemic ‘cautious optimism is returning’. ‘By (the) current assessment, the second wave’s toll is mainly in terms of the hit to domestic demand. On the brighter side, several aspects of aggregate supply conditions -- agriculture and contactless services are holding up, while industrial production and exports have surged amidst pandemic protocols,’ the RBI said in its report, the lead author of which is Michael Patra, deputy governor of the central bank. Citing statistical and mathematical models, the RBI said ‘greater improvement was expected by early July’.

Stressing that the speed and scale of vaccination would shape recovery, it said that the economy had the resilience and the fundamentals to bounce back from the pandemic and unshackle itself from pre-existing cyclical and structural hindrances. The central bank in its June policy lowered its gross domestic product (GDP) estimate to 9.5 per cent for 2021-22, from 10.5 per cent earlier. The forecast was done on the assumption that the impact of the second wave would remain confined to the first quarter of the year, and will be helped by the base effect of last year’s precipitous contraction.

Quantifying the impact of the first quarter, the RBI said the second half could shave off Rs 2 trillion of 2021-22 output. However, it said the second wave has reached smaller cities and villages, impacting rural demand. This time the government may not be in a position to spend as much as last year to revive demand. The central bank also defended the transfer of Rs 99,122 crore as dividend to the government. The nearly Rs 1 trillion transfer, according to the RBI, was just 0.44 per cent of GDP, and was generated through saving on balance sheet provisions and employees’ superannuation and other funds.

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