Coronavirus Hangs Over India’s Future Like A Spectre, Says RBI

The Reserve Bank of India said the Covid-19 pandemic is hanging over the future “like a spectre” as the spread of the new coronavirus, the accompanying lockdowns and the expected contraction in global output in 2020 weigh heavily on India’s growth outlook.

While the outlook for 2020-21 was looking up prior to the virus outbreak, the growth projections now will be made after a clear fix on the intensity, spread and duration of Covid-19, RBI said in its monetary policy report. “Overall, apart from the continuing resilience of agriculture and allied activities, other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread and duration.”

The forecast will depend on how quickly the pandemic is contained and the lockdowns are lifted to enable economic activity to resume, it said, adding that the measures by the central bank and the government will help mitigate the damage to growth once normalcy is restored.

While RBI stayed away from giving forecasts for India’s GDP growth in FY21, it said a decline in global growth could shave 80-180 basis points off domestic growth. A study by the banking regulator offered two alternative scenarios using the quarterly projection model:

• Scenario 1: Global growth in 2020 is 3 percentage points lower than in 2019. In this case, domestic growth could be lower, at its peak, by 180 basis points.
• Scenario 2: The outbreak is contained faster and the global output growth is only 1.5 percentage points lower than 2019. Then the growth in India could be lower by 80 basis points.

Inflation could be lower by 40-100 basis points at its peak under the two scenarios.

Reduced global output and demand can affect exports adversely, leading to lower domestic demand, growth and inflation, RBI said. On the other hand, softer international crude and commodity prices can benefit India as the nation is a net importer, it said.

Also Read: Virus Crisis Is a Chance for India to Reform its Economy

Deflationary Pressure

While forward-looking indicators were signalling a softer inflation trajectory, “the balance of inflation risks is slanted even further to the downside”, RBI said.

CPI inflation is tentatively projected to ease from 4.8 percent in the first quarter ending June, to 4.4 percent in the second, 2.7 percent in the third and 2.4 per cent in the fourth quarter, according to RBI. But, it said, in the prevailing high uncertainty, aggregate demand may weaken further than anticipated and ease core inflation further, while supply bottlenecks could exacerbate pressures more than expected.

“With several major economies in lockdown mode, demand conditions may weaken sharply. Accordingly, countries across the world are bracing up for deflationary forces to take hold. India may not be immune to these extreme downside pressures imparted by the pandemic,” RBI’s monetary policy report said. “With the entire country in lockdown, the NSO would face considerable challenges in compilation and measurement of consumer prices.”

Also Read: Tracking India’s Steps to Contain Economic Fallout of the Virus

A quick containment of Covid-19, however, could lead to faster recovery and, therefore, firmer inflation pressures, it said.

For the next FY22 fiscal, the report projected that inflation could move in a range of 3.6-3.8 percent, assuming a normal monsoon and no major exogenous or policy shocks.