Macro-economic parameters in recent RBI monetary policy report

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

Almost one-and-a-half months back, when the Reserve Bank of India published its annual Report, it did not disclose, the most sought-after economic parameter namely the GDP growth rate for the first quarter of 2021; rather it said in the report that it will wait for the NSO to come up with the rate. The NSO figure made available on 31st August has shown an unprecedented decline in GDP for Q1 at constant prices (2011-12) for the year 2020-21which was to the tune of 23.9 per cent as compared to last year of the same period. Now the RBI has come up with its assessment of the GDP growth rate which is expected to contract by 9.5 per cent in 2020-21. Despite this calculation, the RBI Governor has painted a rosy picture of the economy in his report citing the pickup in the agricultural activities in the rural economy sector. For RBI, there is now nothing that could hamper the economic growth of India - every sector of the economy being at a stage of take off (!) and by fourth quarter of the current fiscal, we will be at pre Covid-stage. However, the RBI has not substantiated its expectation with concrete proof.

The RBI's confidence is based mainly on the visible positive performance of the primary sector. The activities in the rural economy are picking up no doubt but until we see for ourselves the final outcome, it is difficult to be so sure about the performance of the sector. Crop plantation has already crossed the last year's performance, while sharp improvement has been achieved in the mechanization of agriculture – as purchase of tractors has crossed the pre-Covid level by about 37 per cent, two wheelers sale have crossed by 4 per cent, but fertiliser sale has fallen from the July level and agricultural credit (Outstanding) yet to pick up. Thus on the whole, demand has picked up no doubt but its sustainability cannot be guaranteed as yet. Some experts' assessment is also that this will be another year to surpass the food grains production like that of the last year. But unless harvesting and yield data is received, such complacency as that of RBI remains only hypothetical. While dealing with the rural economy, RBI expressed satisfaction over the jobs created under MNREGA and linked it to the uplift of rural sector. The RBI perhaps have forgotten the fact that the rural sector was almost free from Covid-19 lockdown (except that of the first spell) but despite that at all India level till this October only 52.67 lakhs additional employments have been created under MNREGA over the last year which is quite insignificant compared to number of displaced persons due to lockdown. Moreover, the increase is sectoral and mainly concentrated amidst the richer States. Such unbalanced sectoral growth will lead to serious regional disparity in future. While mentioning the urban service sector, the RBI appears to be happy with the fact that conditions of obtaining urban housing loan has been relaxed and it will enhance the construction activities in the urban sector. But the RBI has forgotten that the millions of migrant labourers have not yet come back to the work after they left for their homeland. The real estate developers and the Construction Houses yet to operate with their full capacity because of the shortage of labour force.

In respect of the performance of the manufacturing sector, the Bank appears to be fully satisfied considering the fact that Purchasing Managers' Index (PMI) for this sector has gone up to 56.8 in September. A PMI of below 50 indicates the contraction of the sector while 50 and above indicates an expansion of activities in the sector. There is a discrepancy in the PMI figure calculated by the IHS Markitt which is 51.1 to that of the RBI. According to IHS Markitt, the PMI remained static for both August and September indicating the sluggish growth in the sector during the period. The general Index of Industrial Production (IIP) also shows that it is far below the pre-Covid level (88) indicating thereby that the sector has not yet recovered. Another frustrating news in this area is that gross bank credit to micro small and medium enterprises (MSME) has not picked up in the first month of second quarter. According to the RBI bulletin (September 2020) although there was growth of 5.1 per cent comprising Rs 11 lakh crore from Rs 10.47 crore in July 2019 yet in terms of the financial year there was actually contraction to the tune of minus 4.2 per cent when compared with Rs11.49 lakh crore deployed in March 2020. During this period however, the credit off-take in infrastructure particularly power, road and agriculture sectors increased substantially. This was unexpected. However, MSME sector does not appear to be indifferent to the credit but plays defensive under the backdrop of Covid-19 generated uncertainties.

The RBI has expected that the borrowing programme of both Centre and State will be completed in a non-disruptive manner without compromising on price and financial stability. Knowing very well that the 60 per cent increment in the Ways and mean Advance limit for the States will open up new avenues for inflation-first by way of making unproductive expenditure in the States- especially those will go for general election and then by way of spending all through the remaining six months period.

In the financial market RBI has agreed to keep the Repo Rate and Reverse Repo rate unchanged at 4 per cent thereby making the money market easily accessible to the public. This will on one hand increase investment and in turn money supply in the market leading to easy liquidity in the market. The bank earlier increased the investment permitted to be classified as held on maturity (HTM) from 19.5 per cent to 22 per cent of NDTL in respect of Statutory Liquidity Ratio (SLR) securities involving the period from 1st September 2020 to 31st March 2021. Now this has been extended to 31st march 2020. This will enable the commercial banks to plan their SLR investment in an effective manner. The announcement of open market operation on purchase of State Development Loans (SDL) will ensure the programme of State borrowing in an orderly manner.

The fact that the service sector was in collapse in the last quarter of the 2019 and till the first quarter in the current fiscal has been discussed in detail in this column earlier on several occasions. As against the 5.5 per cent growth in the April-June quarter of 2019, the first quarter contraction in 2020 was almost 24.3 per cent which is unprecedented. The PMI in service sector although improved to 49.8 in September 2020 yet it still in the contraction zone (being <50).

The economic scenario on the whole undoubtedly is encouraging but it is difficult to assess its sustainability especially when the infection from Covid-19 is going on without respite. What is essential at this stage is to keep vigil against the unwarranted inflation that may flare up due to Government's policy of keeping money supply undisrupted for creation of demands which may prove fatal for the economy.