RBI Annual Report 2019-20: Shock To Consumption Severe, Will Take Time To Mend

Reserve Bank of India has said private consumption in India, hurt by lower incomes, job losses and behavioural restraints, will take time to revert to pre-pandemic levels as the recovery has lost strength.

“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,” the central bank said in its annual report for 2019-20 published on Tuesday.

The uptick seen in high frequency indicators in May and June after the lockdown curbs were eased appears to have lost strength in July and August, the report said. The RBI attributed it to reimposition of lockdowns, saying that economic contraction will likely prolong into the second quarter of FY21.

Private consumption has lost its discretionary elements across the board, particularly transport services, hospitality, recreation and cultural activities, it said, adding that behavioural restraints may prevent the normalisation of demand for these activities. Even when private consumption does take hold, non-discretionary spending will lead recovery until a durable increase in disposable incomes enables discretionary spending to catch up, the report said.

While urban demand has suffered a bigger blow, rural demand continues to hold up better, aided by forecasts of a normal monsoon, the RBI said. But a fuller recovery in rural demand is also being held back by muted wage growth which is still hostage to the migrant crisis and associated employment losses, it said.

Self-employed and casual workers together account for 51.3% of the urban workforce, according to staff estimates by the RBI. As a result, the pandemic has had a disproportionate impact on urban areas. To be sure, even in rural areas, 40% of casual labourers are employed in the construction sector, which came to a complete halt during the lockdown, it said.

While private demand remains weak, government consumption is expected to support the economy. However, the state of government finances would also limit it’s consumption, the central bank said. The report highlighted the loss of momentum in economic recovery, and stressed on the need for further reforms.

Other Key Takeaways

• Following an unprecedented retrenchment in economic activity, 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, the report said.
• This is mainly due to reimposition or stricter imposition of lockdowns, suggesting that contraction in economic activity will likely prolong into Q2FY21.
• Government consumption spending has provided a measure of relief, with central government’s revenue expenditure, net of interest payments and major subsidies, having risen by 33.7% in the first quarter of the year.
• Government consumption is expected to continue pandemic-proofing of demand. However, public finances have been stretched by the imperative to mitigate the impact of Covid-19 and headroom for continuing support to aggregate demand may be severely diminished.
• State finances are likely to be squeezed so much that cuts in growth-giving capital expenditure seem quite probable.
• As the wind-down begins and consolidation resumes, it is prudent to expect lower contributions of government consumption expenditure to overall demand.
• As such, the future path of fiscal policy is likely to be heavily conditioned by the large overhang of debt and contingent liabilities incurred during the pandemic.
• A credible consolidation plan, specifying actionables for reduction of debt and deficit levels, will earn confidence and acceptability, rather than just extending the path of touchdown.
• Declining capacity utilisation, weakening consumption demand and the overhang of stressed balance sheets are restraining new investment. Underlying developments suggest that the appetite for investment is anaemic and in need of more reforms.
• A recapitalisation plan for public and private sector banks assumes critical importance as minimum capital requirements for banks may no longer suffice to absorb post-pandemic losses. It also emphasised on the need for cultivating alternatives to bank finance.