RBI says economic cost of second Covid-19 wave may be limited to Q1 | Business Standard News

Clipped from: https://www.business-standard.com/article/economy-policy/covid-19-crisis-govt-must-step-up-expenditure-to-boost-demand-says-rbi-121052701722_1.html

Government must now step up expenditure to boost demand for private investment and consumption, said RBI

According to RBI, “the recovery of the economy from Covid-19 will critically depend on the robust revival of private demand that may be led by the consumption in the short-run but will require acceleration of investment to sustain the recovery.” | Illustration: Ajay Mohanty

The Reserve Bank of India (RBI) on Thursday said under a most optimistic scenario, the macro-economic costs of the second wave of the Covid infections could be limited to the first quarter, with possible spillovers into July, but the government must now step up expenditure to boost demand for private investment and consumption.

The pandemic, though, at the moment continues to remain the biggest risk for the economy, though banks are “better positioned than before” in managing stress in balance sheets as they now have higher capital buffers, improved recoveries and have returned to profitability after witnessing moratorium pressures last year, the central bank said.

“The near-term outlook is clouded, with an accentuation of downside risks and potential externalities of global spillovers, but over the course of the tumultuous year gone by, there have been learnings and adaptations. Drawing on these lessons, India can prepare for the year ahead with confidence and fortitude,” the RBI said in its annual report for the financial year 2020-21.

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Faster vaccinations hold the key in overcoming the pandemic, and “public policies must design and implement strategies that put us back on a secure path of strong and sustainable growth with macroeconomic and financial stability so that India is once again engaged in achieving its developmental aspirations,” the report said.

Role of govt and RBI

Importantly, the RBI called for a public expenditure and investment-led strategy that would boost consumption demand.

“Increase in consumption and investment during a downcycle boosts GDP (gross domestic product) growth more than during an upcycle,” the report said, adding, an increase in investment leads to higher consumption. This suggested that “an investment-led recovery could boost both output and consumption. “

Therefore, a “mix of policies may be needed,” as very low-capacity utilisation rates may leave little incentive for the private sector to start a strong investment cycle.

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According to the central bank, “the recovery of the economy from Covid-19 will critically depend on the robust revival of private demand that may be led by the consumption in the short-run but will require acceleration of investment to sustain the recovery.”

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Once the economy becomes stable, the government can cautiously come out of its expansionary policies, so as to avoid stoking inflation.

The report said central and state government deficits could rise when revised estimates are released and high levels of deficit and debt could pose challenges in financing once private investment picks up.

The inflation trajectory, meanwhile, would be subject to both upside and downside pressures. The food inflation would depend on the monsoon, while there was a case for reducing taxes on petroleum products even as the crude prices remain volatile in the international markets.

The RBI’s monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, “with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.”

The central bank will also keep liquidity comfortable throughout the year, and will ensure that monetary transmission continues unimpeded while maintaining financial stability.

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As per RBI, banks and other financial institutions reported frauds of Rs 1 lakh and above to the tune of Rs 1.38 trillion in 2020-21, down 25 per cent from the previous year. The number of frauds were down 15 per cent at reported 7,363.

The overall number of counterfeit notes in the system fell, but there was a 31.3 per cent rise in counterfeit notes, year on year, in the case of Rs 500 notes.

The RBI said money multiplier stood at 5.4 in 2020-21, which is marginally below its decennial average (2011-20) of 5.5. However, adjusted for the reverse repo – analytically more meaningful and akin to banks’ deposits with the central bank – money multiplier turned out to be lower at 4.7 in 2020-21, explaining the slowdown in money creation under subdued credit demand conditions.

The currency-deposit ratio stood at 17.3 per cent in 2020-21, slightly above its decennial average (2011-20) of 15.1 per cent.

“The shift in the public’s preference towards stashing cash, the most liquid asset, was in response to the uncertainties relating to the pandemic,” the report said.

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