RBI paints gloomy outlook for economy

RBI paints gloomy outlook for economyRBI Governor Shaktikanta Das

  • Says no growth as GDP will contract in FY21, Covid-19 impact more severe than anticipated
  • Inflation outlook highly uncertain
  • GDP course hinges on Covid-19
  • Biggest blow to pvt consumption
  • Many sectors in acute stress
  • Agriculture a beacon of hope

Domestic economic activity has been impacted severely by the two-month lockdown. The top-six industrialised States that account for about 60 per cent of industrial output are largely in red or orange zones– RBI Governor Shaktikanta Das

Mumbai: Painting a gloomy picture of the economy, the Reserve Bank of India (RBI) on Friday said the impact of Covid-19 is more severe than anticipated and the GDP growth during 2020-21 is likely to remain in the negative territory.

The outlook of inflation also remains 'highly uncertain', RBI Governor Shaktikanta Das said while announcing a 40-basis point cut in the repo rate as part of the monetary measures to deal with the current crisis. It is the second sharp cut in the key policy rate in two months. On March 27, the Monetary Policy Committee (MPC), the rate-setting panel of the RBI, had cut the key short-term lending rate by 75 basis points.

Given all the uncertainties related to the lockdown and social distancing, he said, "GDP (gross domestic product) growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from second half of 2020-21 onwards."

Observing that the risk to the growth are 'gravest', in an address through television, the Governor said "the combined impact of demand compression and supply disruption will depress economic activity in the first half of the year". Even if the economic activities are restored in a phased manner, the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity only in the second half of 2020-21, he added. "Nonetheless, downside risks to this assessment are significant and contingent upon the containment of the pandemic and quick phasing out of social distancing/lockdowns," Das said, adding that much would depend on how quickly the Covid-19 curve flattens and begins to moderate. The end-May 2020 release of NSO on national income should provide greater clarity, enabling more specific projections of GDP growth in terms of both magnitude and direction, he said.

Das-headed MPC, whose meeting was advanced, was of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress. Also, the impact of the shock was compounded by the interaction of supply disruptions and demand compression. In view of the virus crisis, the three-day meeting of the rate-setting body was advanced to May 20-22 from the earlier scheduled date of June 3-5.

"The recent release of macroeconomic data, that for the first time revealed the damage wrought by Covid-19, brought forward the need for an off-cycle meeting of the MPC," the Governor said.

He said domestic economic activity has been impacted severely by the two-month lockdown. The top-six industrialised states that account for about 60 per cent of industrial output are largely in red or orange zones. Giving details, he said electricity and petroleum products consumption - indicators of day-to-day demand - have plunged into steep declines. The double whammy in terms of losses of both demand and production has, in turn, taken its toll on fiscal revenues, he said.

Investment demand has been virtually halted by a decline of 36 per cent in the production of capital goods in March, which was coincident with a contraction of 27 per cent in imports of capital goods in March and 57.5 per cent in April.

"The biggest blow from Covid-19 has been to private consumption, which accounts for about 60 per cent of domestic demand," Das said in his nearly 30 minutes address. He said that by all counts, the macroeconomic and financial conditions are austere.

"The global economy is inexorably headed into recession."

As he projected a grim outlook for the economy, Das also said that "amidst this encircling gloom", agriculture and allied activities have provided a beacon of hope on the back of an increase of 3.7 per cent in foodgrains production to a new record.

More stimulus measures must

RBI itself admitting that GDP growth in the current fiscal will be negative, Ficci feels that more support will be required on an ongoing basis, both from RBI and government and we shall remain engaged and keep providing feedback on behalf of Indian industry

Sangita Reddy, president, Ficci

Improves liquidity position

Since the lockdown period has been extended, the relief measures must adapt accordingly. The RBI announcement is a welcome move to ease the short-term financial burden for all citizens of India and help maintain liquidity as the economy recovers. The measures outline plans to improve functioning of markets, increase investments by FPIs

Rakesh Reddy, Director, Aparna Constructions

More support needed: India Inc

India Inc on Friday said the RBI's surprise move to slash key interest rates will provide a much-needed respite to small businesses and also revive demand. The industry said more support will be required on an ongoing basis both from the RBI and government to stimulate economic growth amid the Covid-19 pandemic. CII DG Chandrajit Banerjee said the RBI should also consider extending this moratorium to NBFCs for their repayment to banks, without which the NBFCs sector is facing acute distress. "Another move the RBI should consider is to allow one-time restructuring of loans to relieve stressed businesses," Banerjee stated.

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