Consumer India confidence is turning upbeat! : RBI

 

GDP is expected to decline by 9.5%! 

 “..If I have the belief that I can do it, I shall surely acquire the capacity to do it…” 

The newly appointed Monetary Policy Committee (MPC) with Dr. Ashima Goyal, Professor Jayanth R. Varma and Dr. Shashanka Bhide as external members met on 7th, 8th and 9th October, 2020 in its first meeting and the 25th under the monetary policy framework that was instituted in June 2016. 

The MPC evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4 per cent. It also decided to continue with the accommodative stance of monetary policy as long as necessary – at least during the current financial year and into the next year – to revive growth on a durable basis and mitigate the impact of Covid-19, while ensuring that inflation remains within the target going forward. The Marginal Standing Facility (MSF) rate and the Bank rate remain unchanged at 4.25 per cent. The reverse repo rate stands unchanged at 3.35 per cent. 

Today, there is a turn in the wind, which suggests that it is not imprudent to dream of a brighter tomorrow even in the bleakest of times. As Dr. A.P.J Abdul Kalam, our visionary former President said: “You have to dream before your dreams can come true…A dream is not that which you see while sleeping, it is something that does not let you sleep.”

After the steep decline into which the global economy plunged in the second quarter of 2020, global economic activity appears to have rebounded sequentially in the third quarter, but unevenly among and within economies. 

Improvement in manufacturing, labour markets and retail sales powered strong recoveries in some countries; whereas in others, a rise in new infections prompted a slower pace of unlocking or re-imposition of restrictions which, in turn, stalled the upturn. 

Generally, investment has remained in retrenchment while consumption and exports have started to improve. 

Massive policy support across all countries has prevented a deeper downslide, providing a floor underneath employment, household incomes and businesses. Financial conditions continue to remain benign. The Indian economy is entering into a decisive phase in the fight against the pandemic. Relative to pre-Covid levels, several high-frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth. Rather than enumerating them, I have, in the interest of time, set them out in an Annex to this statement.  

By all indications, the deep contractions of Q1:2020-21 are behind us; silver linings are visible in the flattening of the active caseload curve across the country. Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-Covid growth trajectory. 

In this environment, the focus must now shift from containment to revival. Undeterred by the pandemic, the rural economy looks resilient. Kharif sowing has already surpassed last year’s acreage as well as the normal sown area. Improved soil moisture conditions, along with healthy reservoir levels, have brightened the outlook for the Rabi season. 

Early estimates suggest that food grains production is set to cross another record in 2020-21. Job creation under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) has provided incomes and employment in rural areas. Meanwhile, migrant labour is returning to work in urban areas, and factories and construction activity are coming back to life. 

This is also reflected in rising levels of energy consumption and population mobility. In cities, traffic intensity is rising rapidly; online commerce is booming; and people are getting back to offices. 

The mood of the nation has shifted from fear and despair to confidence and hope. Some of this optimism is being reflected in people’s expectations. 

In the September 2020 round of the RBI’s survey, households expect inflation to decline modestly over the next three months, indicative of hope that supply chains are mending. Our projections indicate that inflation would ease closer to the target by Q4:2020-21. 

Our other surveys, also conducted in September, indicate that consumer confidence is turning upbeat on the general economic situation, employment and income over a one year ahead horizon. While the current assessment of the overall business situation remains in contraction in Q2, it has moved up from a low in Q1. Forward-looking business expectations are optimistic on the overall business situation, production, order books, employment, exports and capacity utilisation. 

The manufacturing purchasing managers’ index (PMI) for September 2020 rose to 56.8, its highest mark since January 2012, supported by acceleration in new orders and production. The services PMI for September at 49.8 remained in contraction but have risen from 41.8 in August. These expectations are also reflected in our growth projections which suggest that GDP growth may break out of contraction and turn positive by Q4. 

The second category of sectors to ‘strike form’ would comprise sectors where activity is normalising gradually. The third category of sectors would include the ones which face the ‘slog overs’, but they can rescue the innings. These are sectors that are most severely affected by social distancing and are contact-intensive.

The modest recovery in various high-frequency indicators in September 2020 could strengthen further in the second half of 2020-21 with progressive unlocking of economic activity. 

Agriculture and allied activities could well lead the revival by boosting rural demand. Manufacturing firms expect capacity utilisation to recover in Q3:2020-21 and activity to gain some traction from Q3 onwards. 

Both private investment and exports are likely to be subdued, especially as external demand is still anaemic. For the year 2020-21 as a whole, therefore, real GDP is expected to decline by 9.5 per cent, with risks tilted to the downside. If, however, the current momentum of upturn gains ground, a faster and stronger rebound is eminently feasible.

Export Support:

Review of system-based automatic Caution Listing of Exporters: 

Exports have been adversely impacted by the pandemic-related contraction in external demand. In this environment, it is crucial to provide flexibility to exporters in the realisation of export proceeds and to empower them to negotiate better terms with overseas buyers. In order to facilitate the same, and make the caution-listing process exporter-friendly and equitable, it has been decided to discontinue the system-based automatic caution-listing. The RBI will henceforth undertake caution-listing on the basis of case-specific recommendations of the Authorised Dealer (AD) banks. 

Conclusion: 

Covid-19 has tested and severely stretched our resources and our endurance. Our travails are not over yet and a renewed rise in infections remains a serious risk. We have, however, come far on an un-travelled road, with self-belief and the courage of hope. We will reach deep into our fortitude and inner strength to overcome whatever formidable challenges Covid-19 may unleash going forward. 

If we have the resolve to be steadfast till we emerge victorious, I am confident we will muster the forces needed to subdue the pandemic. In the words of Mahatma Gandhi, and I quote"...if I have the belief that I can do it, I shall surely acquire the capacity to do it…"1. Against all odds, we shall strive and revive.