COVID-19 second wave impact on Indian economy not as bad as first, says RBI

The impact of the COVID-19 second wave on the Indian economy is not as bad as the first wave, but the surrounding uncertainties remain, the Reserve Bank of India (RBI) said in its annual report on Thursday.

The central bank noted that while the Indian economy has not moderated to the extent it did during the first wave, enveloping uncertainties can be a hindrance in the short term.

The RBI, in its annual report, further stated that India's growth prospects primarily hinge upon how fast the economy can arrest the impact of the second wave of the COVID-19 pandemic.

It said that although the economy was hit by the second of the coronavirus pandemic, it remained resilient on the back of a bountiful harvest in the RBI farming season as well as the momentum of activity in sectors such as road construction, information technology, housing, and freight transportation.

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''The prospects for the Indian economy, though impacted by the second wave, remain resilient, backed by the prospects of another bumper rabi crop, the gathering momentum of activity in several sectors of the economy till March, especially housing, road construction, and services activity in construction, freight transportation, and information technology (IT),' RBI said in its annual report.

"The recovery of the economy from the COVID-19 will critically depend on the robust revival of private demand that may be led by the consumption in the short-run but will require acceleration of investment to sustain the recovery," the report added.

The RBI further stated that the second wave of the COVID-19 pandemic has set off "a raft of revisions to growth projections" and the concurrence on growth rate was leaning towards its projections. The central bank, in the report, once again pegged a 10.5% growth for India's economy for the 2021-22 financial year.

"The onset of the second wave has triggered a raft of revisions to growth projections, with the consensus gravitating towards the Reserve Bank's projection of 10.5 per cent for the year 2021-22 -- 26.2 per cent in Q1, 8.3 per cent in Q2, 5.4 per cent in Q3 and 6.2 per cent in Q4," it said.

The RBI noted that the previous year has left a scar on the economy and "in the midst of the second wave, as 2021-22 commences, pervasive despair is being lifted by cautious optimism built up by vaccination drives."

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The pandemic, it added, "is the biggest risk to this outlook. Yet, upsides also stem from the capex push by the government, rising capacity utilisation and the turnaround in capital goods imports."

RBI further said that a collective global effort to fight the pandemic will surely bring better results than individual countries fighting on their own.

It also said the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.

According to it the pace of contagion in the second wave of the COVID-19 pandemic has been alarming, stretching the health infrastructure in terms of the capacity to handle a surge of this size and speed.

The report said the deterioration in major fiscal indicators in 2020-21 "may be attributed to the pandemic superimposed on a cyclical slowdown in tax revenues and a counter-pandemic fiscal push through higher government expenditure."

"Going forward, as growth revives and the economy gets back on track, it is important for the government to adhere to a clear exit strategy and build fiscal buffers, which can be tapped into in events of future shocks to growth," the RBI said.

For April and early May 2021, available high-frequency indicators present a mixed picture, it said.

While mobility and sentiment indicators have moderated, several activity indicators have held their own and shown resilience in the face of the second wave.

Goods and services tax (GST) collections crossed the Rs 1 lakh crore mark for the seventh consecutive month in April and notched up the highest level on record, suggesting that manufacturing and services production has been maintained, it said.