RBI's technical recession: Much ado about nothing

Udayan Hazarika

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

Reserve Bank of India (RBI) on 11th November released their bulletin reporting about the unprecedented recessionary situation that the country is facing terming it as 'technical recession'. In the RBI's language "The index nowcasts GDP growth at (-) 8.6 per cent in Q2:2020-21, implying that India is likely to have entered a technical recession in the first half of 2020-21 for the first time in its history with two successive quarters of GDP contraction." This is based on the economic activity index which the RBI has constructed on the basis of economic indicators for last 27 months. The RBI as pronounced not recession but "technical recession" to indicate decline in economic activities consecutively for two quarters namely first quarter (April- June) and second quarter (July to September). Earlier MOSPI had evolved data showing that first quarter fall in GDP will be to the extent of 23.9 per cent compared to the same period of last year. Now the RBI has come up with the negative growth rate to the extent of (-) 8.6 per cent. There is nothing new in it as forecast is already there about annual fall in GDP to the tune of 9.5 per cent in 2020-21 and therefore it is only to be expected that the annual fall will be distributed among the months or quarters – evenly or unevenly - to reach the final stage of 9.5 per cent. Therefore, the so-called technical recession will not in any new way affect the economy other than what it has been expected by way of annual contraction as per early forecast by RBI (RBI annual report). Compared to Indian economy, the UK economy has already in recession since last three consecutive quarters along with Brazil and Indonesia. But China despite being the originator of the virus has successfully averted the technical recession.

One of the significant points indicated by the RBI is the increase in the domestic savings during the recessionary leg. As per the estimate, the domestic savings has increased during the first quarter of this fiscal to 23 per cent from 10 per cent in the same quarter of last year. But this cannot be said to be real until and unless the status sustains at least for two more quarters. Two factors are responsible for this – i) decline in activity due to the lockdown led to the shortage of domestic supply thereby forcing people to save and ii) decline in activity led to reduction in employment and production and inducing the business houses to save the surplus. As soon as the normalcy returns, the situation will change and people will resort to normal spending habits. So increase in savings during an exceptional period cannot be taken as change in consumption or spending habits.

The RBI in its report has made an assessment of the State of the economy taking into account of the status of various macroeconomic indicators all of which however are not based on concrete statistics. Some of the assessments are made on assumptions, while some are arrived at by implications. According to the RBI, positive signs of recovery in the aggregate demands sector could be visible as consumption in power sector (electricity) has gone up from September after lying negative for about six months' time. The power consumption grew by 5.6 per cent in September and till the first week of October, 2020 it registered a double digit growth to 13.65 per cent. Electricity consumption was also up by 11.5 per cent in October of current fiscal on year on year basis. Similar is the case with consumption of fuel (petrol and diesel) with 4.4 per cent in September to 6 per cent in October. There has also been a spurt in the sale of consumer durables showing every sign of recovery. The result of this recovery has also been reflected in the collection of GST which crossed the Rs 1.0-lakh crore mark in October showing a 10.2 per cent increase Y-O-Y basis.

The report is however silent about the status of employment sector except making a statement about the rise in demand for jobs under MNREGA. The Report also mentions the strength of unemployment as worked out by the Centre for Monitoring Indian Economy (CMIE). As per the CMIE's latest report, there has been an overall fall in the unemployment ratio from 23.5 per cent in April 2020 to 7 per cent in October 2020. But the fall is not gradual as there was a rise in unemployment in October (7.0%) compared to that of September when the rate was 6.67 per cent. The CMIE report has also indicated that fall is due to the nonstarter of various industrial projects worth Rs 9.9 lakh crore during the month ending 30th September 2020 which could not take-off due to various reasons. The unemployment to the extent of 27.3 per cent is still prevailing in Haryana followed by 24.1 per cent in Rajasthan. The CMIE's data as per November 13 however shows a marginal decline in unemployment ratio to 6.4 per cent from 7 per cent in October.

On the supply side, the RBI has showed that agricultural activity is picking up. The sector has been surviving even during the lockdown and therefore growth in the sector is not surprising. Agriculture production showed a rise against the last year. Rice (Kharif) procurement has registered a growth of 24.6 per cent in October as against the same period last year. Similarly, wheat procurement was record high this year which resulted in stocks 2.1 times the buffer norms (30.77 million M.T. as on 1st October 2020). Interestingly, the distribution of free food grain under Pradhan Mantry Garib Kalyan Yojana (PMGKY) and National Food Security Act has also been taken as a factor of agricultural growth in the RBI report.

RBI's analysis of performance of industrial sector is mainly based on ISH Markit India's manufacturing index. The IHS Markit India manufacturing PMI shows an increasing trend from September through October from 56.8 in September to 58.9 in October 2020. PMI above 50 indicates that the sector is out of contraction phase and going towards growth. The IHS Markit has marked it as "strongest improvement in the sector in over a decade". However, as against this, the index of Industrial production with base 2011-12 showed only a marginal growth in September by about 0.2 per cent on year to 123.2 negating the market expectation of 2 per cent contraction of the sector. This meagre growth needs to be sustained consecutively in the coming two quarters so as to attain the pre-COVID position.

Service sector, however, is not fully out of shocking condition. The Services PMI for October although stood at 54.1, it is not to be taken as out of danger. The RBI has made an assumption that as the steel consumption statistics is showing an upturn, construction activities might have picked up. But this is not true always. People make purchases under various considerations – they make purchase due to speculative motive — steel prices may go up in future; they may have misinformation about steel supply, or think that fresh lockdown may be imposed at any time etc. Supporting data about consumption of cement is also not yet available. Thus, it is quite early to conclude that construction sector is picking up. In case of sale of automobiles, which is an indicator of 'nowcast' the bank has no consolidated figure to show that car selling has increased but indicated that selling of two wheelers fell as much as 27 per cent while passenger vehicles by 09 per cent as reported by the Federation of Automobile Dealers' Associations (FADA). Similarly, fall in case of three wheelers is 65 per cent indicating clearly that existing three wheelers' use is not optimum and that additional capacity already in the market.

RBI's assessment of the economy should come in a comprehensive manner based on concrete facts and figures. This is a time consuming affair no doubt but if done, will be a document of value. Narratives of speculative situations can at best serve the purpose of news but cannot paint the real picture of the economy.