New Delhi: The Indian economy could turn the corner and register positive growth earlier than expected, but the unrelenting pressure of inflation and a second global Covid-19 wave pose a major risk to growth, the Reserve Bank of India (RBI) said in its monthly bulletin for November.
The bulletin’s ‘nowcasting’ assessment, which forecasts the present or immediate future, has predicted that the economic contraction in the July-September quarter of 2020-21 may also be lower, at 8.6 per cent, compared to the 23.9 contraction in the lockdown-hit April-June quarter. The National Statistical Office will release the data for the second quarter on 30 November.
The RBI said the Indian economy may register a positive growth in the October-to-December quarter after six months of contraction if the economic upturn sustains till the end of the year.
“Incoming data for the month of October 2020 have brightened prospects and stirred up consumer and business confidence. With the momentum of September having been sustained, there is optimism that the revival of economic activity is stronger than the mere satiation of pent-up demand released by unlocks and the rebuilding of inventories,” the bulletin stated.
“If this upturn is sustained in the ensuing two months, there is a strong likelihood that the Indian economy will break out of contraction of the six months gone by and return to positive growth in Q3:2020-21, ahead by a quarter of the forecast provided in the resolution of the monetary policy committee,” it predicted.
The RBI had forecast that the Indian economy could contract by 9.5 per cent in 2020-21, in the monetary policy announcement last month.
Formidable risks to recovery
The RBI, however, warned that there are “formidable downside risks confronting the prospects of the recovery”. It called the pressure of inflation “unrelenting”, and said it was showing no signs of waning despite the implementation of measures like stock limits, import of onions and potatoes, and temporary reduction in import duties.
Inflation figures for the month of October are due to be released by the government Thursday. In September, inflation was at 7.34 per cent, substantially higher than the 6 per cent upper range of the target mandated by the inflation targeting framework.
The monetary policy committee, of which RBI is a part, is mandated by law to target 4 per cent inflation, with an acceptable range of plus/minus 2 per cent.
“There is a grave risk of generalisation of price pressures, unanchoring of inflation expectations, feeding into a loss of credibility in policy interventions and the eventual corrosion of the nascent growth impulses that are making their appearance,” the RBI said.
The central bank also warned that export recovery could be stillborn if demand collapses due to a second Covid-19 wave in the global economy.
It also warned about stress intensifying among households and corporations, pointing out that the stress has been delayed but not mitigated, and could spill over into the financial sector.