RBI says India economy likely to take more time to recover

Bloomberg

India’s central bank said demand in the economy is likely to take more time to mend in the absence of greater fiscal support, even as the government
is constrained in its ability to provide more stimulus.
“An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe,” the Reserve Bank of India (RBI) said in its annual report for the year ended June. “It will take quite some time to mend and regain the pre-Covid-19 momentum.”
Private consumption has lost its discretionary elements across the board, the central bank said, while noting that transport services, hospitality, recreation and cultural activities were particularly affected in Asia’s economy third-largest economy — where consumption accounts for some 60% of gross domestic product.
While India announced 21 trillion-rupee ($282 billion) worth of measures to support the economy through the virus crisis, most of the steps were focused on providing credit support rather than budgetary assistance to boost demand in the near term.
Both the federal government as well as the states have much “less fiscal space to deal with Covid-19 than during the” global financial crisis, according to the RBI. “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,” it added.
Economists in a Bloomberg survey expect the federal government’s budget gap to soar to 7.2% of gross domestic product, more than double the target pegged by Finance Minister Nirmala Sitharaman in February. And along with states, the consolidated fiscal gap is likely to cross 10% of GDP, according to economists.
While the central bank refrained from giving out economic growth projections in the annual report as is usual, it cited the International Monetary Fund and OECD’s forecasts. The IMF sees the Indian economy contracting 4.5% in the fiscal year to March 2021, while the OECD forecast a 7.3% decline in the event of a fresh wave of virus cases among the population.
The RBI said high-frequency indicators have so far pointed to a “retrenchment in activity that is unprecedented in history.” Moreover, resumption of activity in May and June after the lockdown was eased in parts of the country appeared to have lost momentum in July and August, mainly due to re-imposition of stricter curbs by many states.
That suggests that contraction in economic activity will prolong into the July to September quarter, the RBI said.

While the central bank expects government consumption to underpin demand for now, it sees non-discretionary spending leading the way going forward as millions of households are grappling with job losses and wage cuts, forcing them to spend only on essentials like food.
On the country’s struggling financial sector, the RBI said banks needs to be liberated from the risk aversion that is impeding the flow of loans to productive sectors of the economy. Indian lenders were dealing with the highest pile of bad debt among major economies even before the pandemic, making bankers very cautious about giving out new loans.
“The deterioration in the macroeconomic and financial environment is impinging on asset quality, capital adequacy and profitability of banks,” it added.