‘Phoenix-Like’ Rise In Economic Recovery, RBI Paper Says

India may see a V-Shaped recovery, where the V stands for vaccine, says an RBI paper

Pallavi Nahata @PallaviNahata

21 Jan 2021, 04:54 PM IST

Government officials pray over a vaccine storage box containing Covid-19 vaccines due to leave for various vaccination centers in Mumbai, India, on Friday, Jan. 15, 2021. (Photographer: Dhiraj Singh/Bloomberg)

India’s economic recovery is getting stronger based on incoming high-frequency data, according to a review published in the Reserve Bank of India’s monthly bulletin. The pick-up in economic activity and the recent decline in inflation to below the targeted band could open up space for policy action, the paper suggested.

Pointing to the pick-up in trade activity, in particular, the paper said the number of e-way bills issued in December 2020 was the highest, “suggesting that the recovery is no longer aloft on the fleeting tailwinds of festival spending but is rising Phoenix-like on the wings of an intrinsic momentum.”

The shape of the recovery will be V-shaped after all, where “ the V stands for vaccine”, the paper said. It added that since September, India had “bent it like Beckham”, while referring to the Covid infection curve.

Key Takeaways

Aggregate demand conditions have either consolidated recent gains or “vaulted up on strengthening pace” in December 2020.
Business activity is regenerating in an ‘unlock’ mood, incentivised in substantial measure by a simplified return filing system.
Consumer confidence is regaining its groove. The Refinitiv-Ipsos consumer sentiment index inched up by 2.1 percentage points in December, the paper said.
Early indications of price movements of key food items for January point to further moderation in prices of vegetables. CPI core components to continue to see price pressures.
With GDP in striking distance of attaining positive territory and inflation easing closer to the target, policy space could open up to further support the recovery, if these movements sustain.
After a spike to 14.5% in H1, the government gross fiscal deficit to GDP ratio is likely to moderate to 10.4% in H2FY21.
At the sub-national level, information for 20 states show that the growth in capital expenditure turned positive during October 2020 after contracting consecutively for 8 months.
Total expenditure surged 48.3% on an annual basis. Within this expenditure push, growth-nurturing capital expenditure shrugged off a three-month contraction and expanded 248.5%, close to half of which is due to increase in transfers to states for capex in line with Aatmanirbhar 2.0 announcements.
In the first half of FY22, GDP growth will benefit from statistical support and is likely to be mostly consumption-driven.
The need to kick-start investment is acquiring urgency to secure a durable turnaround and a sustainable growth trajectory.

India must look for ways in which cash sitting idly in balance sheets of corporations and banks and reverse repo balances with the Reserve Bank find their way into credit to productive sectors and into real spending on investment activity before it imposes a persistent deflationary weight on real activity.

RBI Paper ‘State Of The Economy’ (January Monthly Bulletin)

It will take years for the economy to mend and heal, but innovative approaches can convert the pandemic into opportunities. “Will the Union Budget 2021-22 be the game-changer?” the report asked in conclusion.