Omicron a flash flood, not a wave, economic recovery remains strong: RBI

Infection surge due to Omicron has dented recovery only temporarily

The Omicron-led third wave of Covid-19 may turn out to be “more of a flash flood than a wave”, and the Indian economy could rebound to pre-pandemic levels, according to the Reserve Bank of India’s (RBI’s) State of the Economy report released on Monday.

The report, part of the RBI’s January bulletin, said: “The overall economic activity in India remains strong, with upbeat consumer and business confidence and upticks in several incoming high-frequency indicators.”

However, the infection surge due to Omicron has dented the recovery to a large extent, albeit temporarily. “The recovery that has been underway in the Indian economy with the ebbing of the second wave of the pandemic is encountering headwinds from a rapid surge in infections in a third wave marked by the rapid transmissibility of the Omicron variant,” the report said. 

Mobility indicators have dropped below the baseline numbers as daily Covid infections rose to over 271,000 on January 13, the highest since mid-May 2021, with the active caseload hitting 1.5 million. However, aggregate demand conditions remain resilient, it said. The issuance of e-way bills surged to 72 million in December, the second highest in its history, indicating “the likelihood of robust collection of goods and services tax (GST) in January 2022”.

“With a strong pick-up in manufacturing and construction, highway toll collections soared by 16 per cent month-on-month (m-o-m) in December. Power consumption rose by 4.5 per cent to 110.3 billion units in December,” it said.

STATE OF THE ECONOMY

• Aggregate demand conditions stay resilient 
• Consumer, business confidence upbeat
• Unfavourable base effect pushing up inflation
• Export growth broad-based; GST collection up
• Global growth recovery, though, uncertain

The Centre for Monitoring Indian Economy (CMIE) data suggested that the labour participation rate turned up to 40.9 per cent in December, the highest since September 2020. The employment rate also improved by 23 basis points, though the unemployment rate worsened to 7.9 per cent in December from 7.0 per cent a month ago.

Export growth was also broad-based, and 10 major commodity groups recorded an expansion above their pre-Covid levels. Inflation, meanwhile, rose due to unfavorable base effects between November and December, the RBI observed. 

“Monetary and credit conditions are improving with bank credit picking up in a gradual but sustained manner. India’s digital payment ecosystem is also expanding rapidly,” it said. 

However, the report noted that the global outlook “remains clouded by considerable uncertainty,” as inflation continues to mount across geographies amidst disruptions in production, supply chains and transportation. 

“There are indications that supply chain disruptions and shipping costs are slowly easing, although the waning of inflation may take longer. This provides a window of opportunity to focus all energies on accelerating and broadening the global recovery,” it said.