RBI’s view on recovery of Indian Economy amid pandemic

Author: Akriti Sharma

A positive view is emerging for the Indian economy, with cautious optimism gaining the ground, the Reserve Bank of India (RBI) stated in its “State of the Economy” report.

Quick Notes from RBI Bulletin-

The turnaround in India’s economy will be determined by the speed and magnitude of vaccination in the country, according to the Reserve Bank of India (RBI).

  1. Speed and scale of vaccination will impact the recovery path going forward. In the event of a pandemic, the economy has the resiliency and fundamental strengths to return to health and unlock its constraint-bound state, freeing it from prior fluctuations and structural weaknesses.
  2. According to the COVID-19 pandemic bulletin, many governments around the world were forced to respond with a large financial commitment.
  3. Because of India’s policy of fiscal retrenchment, emphasis is placed on “how” over “how much.” On top of that, studies conducted across countries show that reducing expenditures, especially those that have permanent reductions in current expenditures, yields more sustainable fiscal consolidation than raising funds.
  4. For the time being, however, cautious optimism is making a comeback, but the Indian economy is still battling the second wave of the pandemic. The toll of the second wave’s effects mainly comes in the form of reduced domestic demand.
  5. It should be noted, however, that vaccines do not end epidemics on their own, even though they are perhaps the greatest scientific achievements in modern history. It will be necessary for us to learn to coexist with the virus.
RBI’s latest decisions on Indian economy

In depth review:

According to the Reserve Bank of India (RBI), economic indicators indicate that the second wave of the pandemic has hit domestic demand while at the same time showing an overall strengthening of the economy.

Domestic demand takes a major hit in the second wave. However, according to the findings of the report by the Reserve Bank of India (RBI), agricultural and contactless services have held up, while industrial production and exports have surged in the face of various pandemic protocols. The Reserve Bank of India expects a better-than-average outcome by the start of July.

It pointed out that by stimulating rapid and widespread vaccination, the economic system had the resilience and fundamentals needed to overcome the pandemic and break free from previously existing cyclical and structural impediments. The central bank reduced its projected GDP for 2021-22 to 9.5%, from 10.5% previously. Forecasts were made assuming that the second wave would stay within the first quarter of the year, which was bolstered by the precipitous contraction from last year. The RBI reported that the second half of 2021-22 could reduce 2021-22 GDP by about 2 trillion units.

Although, the second wave has also arrived in smaller cities and towns, these villages and small towns are also feeling the impacts of it. The RBI expects that the government may not be able to spend as much money as it did last year to kick-start demand.

Additionally, the central bank asserted that the transfer of 99,122 crore in dividends to the government was not controversial. The 0.44% of GDP is transferred out via saving on balance sheet provisions and employees’ superannuation and other funds, according to the RBI. The RBI maintains an independent monetary policy free of fiscal dominance, according to the report.

The relationship between the consumer price index and the wholesale price index has weakened as a result of the recent volatility. Still, across the globe, central banks believe the rising inflation is a temporary phenomenon, and they continually stress their intention to keep easy money policies in place. The MPC projects that long-term inflation will be 5% in 2021-22, with risks evenly balanced.

The central bank noted that with the growth of goods and services tax (GST) collection in 2021-22 to date, compared to the previous year, a surplus has already materialised, providing confidence that the revenue base for states will be maintained despite the 7% growth.

Conclusion

The RBI also stated that the yield curve had steepened, causing short-term interest rates to decline more than proportionately. A further effort to cope with the virus includes increased investment in healthcare, logistics, and research, as well as routine vaccines. To make recovery last, it is imperative that it is founded on long-term business investment and productivity growth.

Reference: ET, BL, BS, Mint, & RBI Report.

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