Global Economy

Economy coming out of the shadow of the pandemic: RBI paper

The Indian economy is picking up leaving behind the shadow of the pandemic as consumer demand improves and supply constraints ease due to strong kharif agricultural production and revival in manufacturing and services. Also softer food prices are aligning headline inflation closer to the target of 5.3 per cent for FY’22.

Yet global uncertainties, rising global inflation and the risk of a sudden spike in cases poses a risk, an assessment of the economy by RBI deputy governor Michael Patra and his team, published in the latest monthly bulletin say.

“The green shoots of revival have spilled out of the high frequency indicators and on to the headline metrics in a recovery that is progressively solidifying” the report said. RBI’s Economic Activity Index (EIA) indicates that real GDP grew by 9.6 per cent in July-September 2021

Kharif food grains production in 2021-22 is slated to touch an all-time record. Industrial production had rebounded past its 2019 level, with all constituents sharing in the breakthrough in sequential improvement, including the laggard – manufacturing – but excluding consumer durables which are in a slower catch-up.

The swing in the current account balance from a deficit to a surplus of 0.9 per cent of GDP in the first quarter of 2021-22 is driven by a shift in gears from weak domestic and external demand to the robust strength of export performance of both merchandise and software, according to Patra and his team’s assessment.

Although the latter’s current perceptions indicate elevated inflation, their expectations over a year ahead have dipped 60 basis points. Housing sales are surging in the top seven cities.

RBI’s surveys also indicate that government spending, strong order books and the improving pace of execution is lifting demand conditions across infrastructure-linked and services sectors, with downgrades confined to contact-intensive hospitality and aviation, power, real estate and textiles. Business conditions have recovered from second wave lows across firms in manufacturing, services and infrastructure.

The main downside to the prospects for the Indian economy, abstracting from the pandemic, is the possibility of a sudden accentuation of global risks. Indications are that the momentum of global growth is slowing, especially in the countries that were to be its key drivers. Retail sales spending, global car sales, industrial production and world merchandise trade have moderated, with shortages widening in key sectors such as semi-conductors and shipping.

Elevated inflation levels among developed and developing countries alike are widely regarded as transitory but the sense is that it is expected to stay for longer, at least into 2022. Besides, Evergrande and recent trepidations relating to the US debt ceiling have shone light on the wider trend of rising indebtedness.

In this challenging environment, the RBI’s monetary policy committee (MPC) maintained status quo on the policy rate and its accommodative stance in its early October meeting . With inflation easing for two months in a row, the MPC decided to keep prioritising the case for the recovery.


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