The Reserve Bank of India recently released its monthly bulletin for May 2021 amidst challenging times. India is witnessing a deadly second wave of coronavirus which has paralysed the health infrastructure.
The fatalities are recording new highs daily and practically the whole of India is under some sort of a lockdown.
Rating agencies have started to cut India’s GDP growth forecast for financial year 2021-22 amidst growing concerns of the pandemic hitting economic activity in Q1. RBI has said that it will continue to monitor the emerging situation and deploy all resources and instruments for individuals, business entities and institutions impacted by the second wave.
There are five key themes which emerge from the release.
1. Economic impact not as severe as the first wave
The RBI says that the resurgence of COVID-19 has “dented but not debilitated economic activity” in the first half of Q1 FY 2021-22. Although things are still unfolding and uncertainty exists “the loss of momentum” is not as severe as a year ago. This is the broad consensus in the market.
2. Toll in form of demand shock, supply less impacted
According to the RBI, “while the real economy indicators have moderated through April-May 2021, the biggest toll of the second wave is in terms of a demand shock - loss of mobility, discretionary spending and employment, besides inventory accumulation. The aggregate supply has been less impacted.”
On the supply side the resilience of the agricultural sector stands out. RBI points out “The record foodgrains production and buffer stocks in 2020-21 provide food security and support to other sectors of the economy in the form of rural demand, employment and agricultural inputs and supplies, including for exports.”
The forecast of a normal monsoon is expected to sustain rural demand and overall output in 2021-22. This is also likely to have a soothing impact on inflation pressures. The disruption in manufacturing units so far is minimal.
3. Impact is U-shaped
You would have heard a lot about K shaped recovery last year. According to RBI, the impact of the second wave appears to be U-shaped.
“Each shoulder of the U represents sectors that are weathering the storm - agriculture at one end and IT on the other. On the slopes of the U are organised and automated manufacturing on one side and on the other, services that can be delivered remotely and do not require producers and consumers to move. These activities continue to function under pandemic protocols.”
In the well of the ‘U’ lie the most vulnerable sectors. These include blue collar workers and daily wage earners who have to risk exposure for a living. Also includes doctors and healthcare workers; law and order; and municipal personnel who are working day and night to help people recover from the pandemic.
It includes small businesses, MSMEs in the organised and unorganised sectors which are the most impacted and require priority in policy interventions. For these borrowers - individuals, SMBs, MSMEs - having aggregate exposure of up to Rs 25 crore and which have not availed restructuring under any of the earlier restructuring frameworks including resolution framework 1.0 - a new resolution 2.0 has been announced by the RBI.
4. Build-up in input price pressures remains a concern
“Manufacturing and services PMIs along with rising wholesale price index inflation show a persistence of input price pressure. The build-up in input price pressures across sectors, driven in part by elevated global commodity prices, remains a concern.”
The forecast of a normal monsoon is expected to have a soothing impact on inflation pressures.
The Wholesale Price Inflation (WPI), released after the monthly bulletin, climbed to an all-time high of 10.49% in April 2021. It is expected to rise further in May as per experts before commencing a downtrend trend. This would not leave much space for rate cuts from the RBI even though the monetary stance is expected to remain accommodative.
5. Cases plateauing, focus on containing spread in rural areas
As per the RBI, India might be approaching the peak of the devastating second wave. 18 states have reported plateauing of new cases. Recoveries are now far greater than daily new cases.
However, the wave is shifting from big cities to small towns and villages where testing is low and health infrastructure poor. We must refocus our efforts and energies to put down the virus in these areas.
The key lesson, as per the RBI, from the visitation of the second wave is vaccinate, vaccinate, vaccinate.
The RBI sums it up philosophically: the road ahead is fraught with danger, but India’s destiny lies not in the second wave, but in life beyond it.