Negative growth ahead


There are dark days ahead in terms of growth, jobs, incomes and livelihoods. The first official confirmation of India slipping into negative GDP growth rate this fiscal came from Reserve Bank of India Governor Shaktikanta Das while unveiling a fresh set of measures — a cut in the repo rate by 40 basis points to 4% and extension of moratorium on all term loans by another three months — to revive the economy that has come to a standstill due to coronavirus pandemic.

As the global economy, ravaged by the pandemic, is inexorably headed into a recession, India’s GDP growth in 2020-21 is estimated to remain in negative territory. Even though the lockdown may be lifted by the end of May with only a few restrictions, the economic activity may remain subdued due to physical distancing measures and temporary shortage of labour. The central bank has predicted that recovery in economic activity is expected to begin in the third quarter and gain momentum later as supply lines are gradually restored to normalcy and demand revives. The RBI’s Monetary Policy Committee, which met ahead of its scheduled meeting in early June, kept its “accommodative” stance, implying it could ease further. With the latest cut, the repo rate is the lowest since 2000 while the reverse repo rate has been slashed from 3.75% to 3.35%. The off-cycle move may have caught the markets off-guard, but it should not be a total surprise given the dismal economic activity indicators.

With limited space for fiscal expansion, the central bank will have to do the heavy lifting and further rate cuts are not ruled out. The long term repo operations as a monetary tool is expected to improve liquidity, boost consumption and catalyse economic growth. The onus is now on the banks to transmit lower rates to borrowers. But, the experience shows that banks have been reluctant to pass on the benefit to the customers. While the rate cut should ease the cost of credit further, its overall effectiveness in stimulating growth is doubtful in the absence of demand for credit and the extreme risk aversion among banks. As per the assessment of the MPC, the inflation outlook remains highly uncertain.

However, the crisis right now is growth and not inflation. The macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated. The two-month-long lockdown has severely affected the revenues while the biggest blow to the economy came from the slump in private consumption. The Indian economy is now on a ventilator and precious little can be done until the lockdown is completely lifted. The approach of both the monetary and fiscal authorities seems to be to ensure survival for now.

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