RBI Annual Report Highlights Shock To Consumption, Says It Will Take Quite Some Time To Regain Pre COVID-19 Momentum

The Reserve Bank Of India (RBI) in its latest annual report stated that high frequency indicators that have arrived so far point to a retrenchment in activity that is unprecedented in history. Moreover, 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, mainly due to reimposition or stricter imposition of lockdowns, suggesting that contraction in economic activity will likely prolong into Q2.

RBI stated in its outlook that going forward, government consumption is expected to continue pandemic-proofing of demand, and private consumption is expected to lead the recovery when it takes hold, with non-discretionary spending leading the way until a durable increase in disposable incomes enables discretionary spending to catch up. 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.

In the case of state finances, space is likely to be squeezed so much that cuts in growth-giving capital expenditure seem quite probable. 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 touch-down.

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