It might take years for GDP to regain lost output: RBI MPC member

The Reserve Bank of India releases minutes of the October 7-9 meeting of its monetary policy committee.

The Reserve Bank of India (RBI) on Friday released the minutes of the October 7-9 meeting of its monetary policy committee (MPC), outlining the thinking of the central bank's leaders about the economy.

The MPC, as expected, kept the repo rate, its key lending rate, at 4.0 per cent, while the reverse repo rate or the key borrowing rate stayed at 3.35 per cent. The central bank projected sees India’s real GDP contracting by 9.5 per cent in the ongoing fiscal year, and economic growth only turning positive in the final January-March quarter.

"On the domestic front, high frequency indicators suggest that economic activity is stabilising in Q2:2020-21 after the 23.9 per cent year-on-year (y-o-y) decline in real GDP in Q1 (April-June). Cushioned by government spending and rural demand, manufacturing – especially consumer non-durables – and some categories of services, such as passenger vehicles and railway freight, have gradually recovered in Q2,” according to the committee's assessment. 

"The outlook for agriculture is robust. With merchandise exports slowly catching up to pre-Covid levels and some moderation in the pace of contraction of imports, the trade deficit widened marginally sequentially in Q2,” according to the assessment.

Michael Patra, deputy governor at the RBI and a member of the MPC, said it might take years for India's GDP to regain lost output due to the coronavirus pandemic.

"If the projections hold, the level of GDP would have fallen approximately 6 per cent below its pre-Covid level by the end of 2020-21 and it may take years to regain this lost output. There is also an anecdotal sense that the economy’s potential output has fallen, and the post-Covid growth trajectory will look very different from what has been recorded so far. Changes in social behaviour and norms of commercial and workplace engagements may accentuate this structural change," said Patra.

RBI governor Shaktikanta Das predicted India's economic recovery would be led by rural demand. “After the sharpest contraction in economic activity in Q1:2020-21, a number of high frequency indicators of economic activity for Q2:2020-21 indicate a sequential improvement. The recovery in all likelihood would be led by rural demand,” he said.

"In urban areas too, there are indications of an uptick in consumption demand with passenger vehicles emerging out of contraction in August, rebound in GST e-way bills to prepandemic levels, sequential improvement in GST revenues in September and a steady improvement in PMI manufacturing and services."