RBI officials including Deputy Governor Michael Debabrata Patra brought an article on the ‘State of the Economy’.
The article has flagged the ‘demand shock’ inflicted by the second wave of the COVID-19 pandemic.
What are the key indicators?
There is loss of mobility, impact on discretionary spending and increase in unemployment.
These are cited as clear signs that demand is in the low phase.
Several high-frequency indicators for April 2021 have captured the reversal in momentum.
GST e-way bills, an indicator of the health of domestic trade, contracted 17.5% month-on-month.
Automobile fuel consumption, commercial vehicle sales and domestic air passenger traffic all shrank from the preceding month.
The previously relatively unaffected rural economy too saw decreased demand as new COVID-19 infections spread deeper into the countryside.
Also, unemployment, which hit a four-month high of 8% in April 2021, was at 9.5% on May 18, 2021 based on a 30-day moving average.
Crucially, rural unemployment captured by the moving average has risen to 8.6%.
Worryingly, this comes at a time when the pandemic would demand higher spending on health for the rural households.
How does the future look?
The last fiscal year led to a crippling contraction in the economy.
The virus continues to spread in the country at a massive scale.
The pace of vaccinations too have slowed nationwide, more so in rural and semi-rural areas.
The agriculture sector is likely to face challenges in the coming months, when sowing for the kharif crop will need to be done.
Rural demand has low scope with only around the barest of essentials including food and medicines possible.
Added to this is the rising cost of transport fuels, and the sharp increases in commodity prices, cutting across agricultural and industrial raw-materials segments.
There is thus ‘a worsening of domestic cost conditions’ as the RBI officials warn.
What is the way ahead?
Accelerating inflation threatens the economy’s overall consumptive capacity.
Policy makers also need to be wary of the real danger of stagflation.
The shrinking fiscal space notwithstanding, authorities need to spend more on an expedited nationwide vaccine roll-out.
They must also seriously consider direct cash transfers to boost demand.
