Coronavirus pummelled an already low aggregate demand: RBI

In its annual report for RBI’s fiscal 2019-20 (ending June 2020), the central bank said the pandemic and the nationwide lockdown following the spread of the disease have combined to suppress demand and consumption across the board, resulting in meltdown of aggregate demand in the economy.

"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,” the report stated.

Going forward, RBI says, 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. 

The RBI’s survey indicates that consumer confidence fell to an all-time low in July, with a majority of respondents reporting pessimism relating to the economy, employment, inflation and income, but expected recovery in the year ahead.

The survey shows that urban consumption demand has suffered a bigger blow - passenger vehicle sales and supply of consumer durables in first quarter (Q1) of FY2020-21 have dropped to a fifth and one third, respectively, of their level a year ago; air passenger traffic has ground to a halt. 

Rural demand, by contrast, has fared better. Among underlying indicators, tractor sales picked up by 38.5 per cent in July, spurred by the robust pace of kharif sowing, while the contraction in motorcycle sales declined in July (from 35.2 per cent in June to 4.9 per cent in July).  

"A fuller recovery in rural demand is, however, being held back by muted wage growth which is still hostage to the migrant crisis and associated employment losses," the central bank says.

According to the RBI's annual report, initiative under the Pradhan Mantri Garib Kalyan Rojgar Abhiyaan is likely to generate employment in rural areas. Along with increased wages under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), they should provide a fillip to rural incomes.

"Government consumption spending has provided a measure of relief, with central government’s revenue expenditure, net of interest payments and major subsidies, having risen by 33.7per cent in the first quarter of the year," says the report.

"Public finances have, however, been stretched by the imperative to mitigate the impact of COVID-19 and headroom for continuing support to aggregate demand may be severely diminished. 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 economy had already under duress in 209-20 with a slowdown of economic activity as the global downturn dragged down aggregate demand. “After remaining benign in the first half, headline inflation picked up subsequently on spikes in food price inflation. Monetary and credit conditions reflected deceleration in underlying activity in the economy. Financial markets turned volatile in the later part of the year in sync with global markets, reflecting the impact of the pandemic. Public finances recorded deviations from budgetary targets due to shortfalls in tax revenue and disinvestment collections. On the external front, the current account deficit narrowed with net capital flows remaining robust; foreign exchange reserves rose during the year,” the report points out. 

RBI said 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. As the wind-down begins and consolidation resumes, it is prudent to expect lower contributions of government final consumption expenditure (GFCE) to overall demand." 

RBI has suggested a streamlining of tax policies and use of technology to track down deficiencies and defaults by assessing wealth parameters. Besides it suggested rationalisation and simplification of tax procedures, including through automatic invoice matching, intelligence, enforcement, inspection and audit. 

"It is worthwhile to consider an evaluation of the experience with GST by an independent committee which can draw on the lessons gained so far to recommend the way forward," the central bank says.

RBI noted that Indian agriculture is undergoing a distinct transformation, notwithstanding headwinds.

"Going forward, shifting the terms of trade in favour of agriculture is the key to sustaining this dynamic change and generating positive supply responses in agricultural production. Experience shows that in periods when the terms of trade remained favourable to agriculture, annual average growth in agricultural gross value added (GVA) exceeded 3 per cent," the report said.

"Hitherto, the main instrument of incentive has been minimum support prices, but the experience has been that price incentives have been costly, inefficient and even distortive. India has now reached a stage in which surplus management has become a major challenge. The priority is to move to policy strategies that ensure a sustained increase in farmers' income alongside reasonable food prices for consumers. An efficient domestic supply chain becomes critical here.

As per the report, India's manufacturing has been locked in a structural slowdown for "quite some time".

"Reversing this decline warrants a complete rethink. The quality and efficiency of the physical infrastructure, which still significantly lags behind the global median, has to be enhanced to help manufacturing take off," RBI said in the report.

"Benchmarking systems and procedures with the best in the world could galvanise growth in the sector, aided by cleaning up of stressed balance sheets of corporates by raising the efficiency of bankruptcy and solvency procedures."

In addition, the RBI cited the need to unlock entrepreneurial energies and risk appetite by improving the business environment.

"Faster enforcement of contracts, including through expansion of judicial and insolvency capacities, would be a game changer," the report said.

"Property registrations can be speeded up from the current 58 days, and a centralised website can provide real time information on all regulatory compliance requirements."

"In general, the compliance burden can be streamlined substantial. The Covid-19 crisis can be converted into an opportunity by using online provision of education and training to implement reforms in the social infrastructure by skill development and reskilling so as to prepare a labour force equipped to keep pace with a big thrust on infrastructure," the central bank says in its report.