on Jul 16, 2021)The gradual fall in Covid-19 cases and subsequent aggressive vaccination drive across the country has brightened India’s economic growth prospects for the near-term, a report by the Reserve bank of India (RBI) showed.
The daily new cases of Covid-19 in India showed a declining trend since mid-May, indicating tapering of the second wave that wreaked havoc across the country.
Containment measures are being eased by respective state governments cautiously as possibility of a third wave looms.
The Centre plans to inoculate 40 per cent of the adult population by August and the entire adult population by end-December.
The RBI said there had been a rise in mobility indicators and attendance at workplaces, as well as jumps in advance tax payments, power consumption, digital transactions and other indicators in the month of June, all of which it considered forerunners to a revival in business and consumer confidence.
However, the report also noted that momentum of recovery was disrupted in certain segments due to the onset of the second Covid wave and a solid increase in aggregate demand may take some time.
On the supply side, agricultural conditions are turning buoyant with the revival in the monsoon but the recovery of manufacturing and services sectors has been interrupted by the second wave.
“A solid increase in aggregate demand is yet to take shape. Even with a 9.5 per cent GDP growth in 2020-21, there will be substantial slack in the economy and demand pressures may take some more time to become evident,” it said.
Fifth largest recipient of FDI
As per United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2021 (WIR), India became the fifth largest recipient of foreign direct investment (FDI) inflows in the world in 2020.
Gross FDI inflows have amounted to $32 billion in the first five months of 2021 (January to May), that is close to 37 per cent of the entire inflows in 2020.
Global FDI is set to recover some lost ground in 2021, with the Asian region expected to be the major recipient.
The RBI said that the production linked incentive (PLI) scheme was identified as a game changer in attracting export oriented investments that will lead to a rebound of FDI into the manufacturing sector.
Third largest FPI recipient
India emerged as the third largest recipient of foreign portfolio investment (FPI) among major emerging market economies (EMEs) – after China and Brazil — as domestic equity markets witnessed record rallies in the past one year.
The market value of equity holdings of FPIs touched a record $610 billion by mid-June 2021. However, it moderated to $592 billion in the second fortnight of the month, but was still up 14.4 per cent over December last year and 71.9 per cent from its level a year ago.
The surge in FPI inflows coincides with the equity risk premium of Indian equities falling sharply from as high as 5.3 per cent in March 2020 to 3.4 per cent in July so far.
M-cap growth more than world
In terms of US dollar terms, the BSE sensex and NSE Nifty offered gains of 8.3 per cent and 10.8 per cent, respectively, as against 6.9 per cent by the MSCI emerging markets index and 12.5 per cent by the MSCI World index.
India accounted for 2.6 per cent of the world market capitalisation (m-cap) in June 2021.
In fact, India’s m-cap rose 66 per cent in the last 1 year to $ 3.02 trillion in June, outpacing the 44 per cent growth in global m-cap.
Employment situation improving
As per the household survey of the Centre for Monitoring Indian Economy (CMIE), the employment situation has been improving since the second week of June 2021.
The unemployment rate improved to 9.17 per cent in June from a 12-month high of 11.9 per cent in May.
In the rural space, the demand for work under Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) was lower by 21.5 per cent in June 2021 over last year.
Kharif sowing and gradual lifting of Covid restrictions provided workers with alternative employment opportunities, the RBI report noted.
Rise in tax revenue, fall in deficit
The gross fiscal deficit of the central government recorded during April-May was only 8.2 per cent of budget estimates (BE), a stark departure from earlier trends.
While tax revenues remained buoyant, attributable to increased compliance. This was complemented by a higher than budgeted surplus transfer by the Reserve Bank in May, despite slowdown in economic activity due to second wave.
Merchandise trade regaining strength
According to preliminary data released by the ministry of commerce and industry, India’s merchandise exports surpassed the $30 billion mark for the fourth consecutive month in June 2021.
Moreover, non-oil export growth has been in positive territory for the 10th consecutive month now.
On the other hand, India’s merchandise imports posted a growth of nearly 100 per cent y-o-y in June exceeding pre-pandemic level.
Non-oil non-gold imports have stayed above the $25 billion-mark for the seventh month in a row, auguring well for the revival of domestic activity.
Forex reserves at all-time high
Foreign exchange reserves reached an all-time high of $610 billion on July 2, 2021, equivalent to 18.4 months of 2020-21 imports.
The rise in the forex kitty was mainly on account of an increase in foreign currency assets (FCA), a major component of the overall reserves.
Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
Gold reserves climbed $76 million to $36.372 billion in the week ended July 2.
Rise in inflation
Attributing the rise in inflation to the supply side disruptions on account of the pandemic and hardening of commodity prices in the international market, the RBI article opined that these factors should ease over the year as supply-side measures take effect.
“The pick-up in inflation is driven largely by adverse supply shocks due to disruptions caused by the pandemic, including increases in margins and taxes,” it said.
Retail inflation based on consumer price inflation (CPI) moderated to 6.24 per cent in June from 6.3 per cent in May.
There are also specific demand-supply mismatches as in the case of protein-rich food items, edible oils and pulses, which are being addressed by specific supply-side measures, the article said.
Soaring pump prices
Petrol prices in all major cities exceeded Rs 100 per litre mark in the first half of July, with average pump prices in the metros remaining around Rs 102 per litre as on July 12.
Price of diesel was also at record highs, with Rajasthan and Odisha crossing the Rs 100-mark already.
After remaining steady for the last two to three months, kerosene and LPG prices have also registered increases in July so far.
In other words, fuel inflation surged to a record 12.7 per cent in June from 11.9 per cent in May, driven by LPG, kerosene, firewood and chips and dung-cake and impacting both urban and rural consumers.
Manufacturing, services recovery dampened
Tumbling under the weight of the second wave, the headline manufacturing PMI suffered contraction for the first time in the last 11 months, with a reading of 48.1 in June 2021 as against 50.8 a month ago.
Manufacturing output and new orders lost the most, contributing to the overall decline in the index, the RBI said.
Meanwhile, services PMI contracted for the second consecutive month to 41.2 in June from 46.4 a month ago. RBI cited subdued demand and business closures amidst the second wave as the primary reasons for contraction.
Agricultural conditions turning buoyant
Agricultural conditions are turning buoyant with the revival in the monsoon, the central bank said.
Sowing for the kharif season covered 499.9 lakh hectares (around 46 per cent of the total acreage) by July 09. The progress of sowing has, however, been relatively muted, i.e., 10.4 per cent lower than a year ago on account of inroads of the second wave into rural areas, hot weather leading to power slack and break in monsoon’s slow progress.
For all the latest Business News Click Here
For the latest news and updates, follow us on Google News.
