RBI in its annual report said, “Circling back to the formation of domestic demand during 2019-20, consumption turned out to be relatively resilient. Government consumption put a floor underneath the downturn as discussed earlier – without it, real GDP growth would have fallen from the headline of 4.2% to barely 3.3% in 2019-20. Private consumption, which is the bedrock of domestic demand with a share of 57% of GDP, withstood the overall loss of pace and started decelerating only from Q4:2019-20. The main drivers of the slowdown in 2019-20 were investment and exports.”
Talking about consumer price index (CPI) in FY20, RBI said, “After remaining benign in the first half, headline inflation picked up subsequently on spikes in food price inflation.” Headline CPI inflation has averaged 3.9% up to 2019-20, closely aligned with the RBI’s target of 4%.
Further, on the macroeconomic front, RBI highlighted that monetary and credit conditions reflected a deceleration in underlying activity in the economy. Financial markets turned volatile in the latter part of the year in sync with global markets, reflecting the impact of the pandemic. Public finances recorded deviations from budgetary targets due to shortfalls in tax revenue and disinvestment collections. On the external front, the current account deficit narrowed with net capital flows remaining robust; foreign exchange reserves rose during the year.
Going forward, RBI said, “Government consumption is expected to continue pandemic-proofing of demand, and private consumption is expected to lead the recovery when it takes hold, with non-discretionary spending leading the way until a durable increase in disposable incomes enables discretionary spending to catch up. An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum.”
Also, the central adds, private consumption has lost its discretionary elements across the board, particularly transport services, hospitality, recreation and cultural activities. Behavioural restraints may prevent the normalisation of demand for these activities.
However, RBI states that urban consumption demand has suffered a bigger blow – passenger vehicle sales and supply of consumer durables in Q1: 2020-21 have dropped to a fifth and one third, respectively, of their level a year ago; air passenger traffic has ground to a halt.
In regards to rural demand, RBI said, “by contrast, has fared better.” According to the central bank, among underlying indicators, tractor sales picked up by 38.5% in July, spurred by the robust pace of Kharif sowing, while the contraction in motorcycle sales eased in July (from 35.2% in June to 4.9% in July). The decline in production of consumer nondurables turned positive in June.
“A fuller recovery in rural demand is, however, being held back by muted wage growth which is still hostage to the migrant crisis and associated employment losses,” RBI said.
A survey carried in July by RBI indicates that consumer confidence fell to an all-time low, with a majority of respondents reporting pessimism relating to the general economic situation, employment, inflation and income; however, respondents indicated expectations of recovery for the year ahead.
RBI also mentioned that taking note of the heightened uncertainty surrounding the macroeconomic outlook on account of supply chain disruptions and cost-push pressures, the MPC in August 2020 policy said, “It expected headline inflation to remain elevated in Q2:2020-21, but likely to ease in H2:2020-21, aided by favourable base effects.”
As regards the growth outlook, the MPC expected real GDP growth for the year 2020-21 as a whole to be negative.
