The Reserve Bank of India (RBI) has subtly asked the Centre to provide more fiscal support to accelerate economic recovery even as it pointed out that the Indian economy is coming out of the trough faster than most of the predictions.

This observation formed part of its December monthly bulletin which is issued by the department of economic and policy research.

“Although still significant headwinds persist on the path to a durable recovery, steadfast efforts by all stakeholders could help in recouping lost incomes and/or putting back India on a faster growth trajectory,” the RBI said in a hint that the government should not rest with the fiscal support measures it has given so far.

Turnaround factors

According to the RBI, there are two factors that are responsible for the turnaround in the Indian economy. The first is that of India bending the Covid infection curve. Since mid-September, barring localised surges, infections are slanting week after week, and the recovery rate is nudging 95 per cent.

The second was the fiscal stimulus, which the report forecast will improve growth by around two percentage point in the current fiscal.

“Starting out with liquidity/guarantee and cash/kind support to the economy — the need of the hour when the pandemic struck and displaced crores from their lives and livelihoods — it is transiting in a calibrated fashion to supporting investment and consumption demand. ”

“The fiscal measures have been sequenced in a designed shift in focus from consumption expenditure in Pradhan Mantri Garib Kalyan Package (PMGKP) to investment expenditure in Aatma Nirbhar 2.0 and 3.0. On the whole, the above-the-line fiscal stimulus will likely boost growth by close to 2 per cent of GDP in 2020-21,” the bulletin said.

The total size of the fiscal package, including measures announced by the RBI, stands at Rs 29,87,641 crore. The RBI here said that a change in fiscal variable (government expenditure or taxation) leads to a “fiscal multiplier”.

Stimulus impact

“Using these multipliers and based on the fiscal stimulus measures announced so far, it is estimated that government expenditure will add 159 basis points and 158 basis points to growth in 2020-21 and 2021-22, respectively. Here again, the impact of government stimulus measures is likely to pan out in the second half of the current financial year, operating mainly through the investment revival channel,” the report observed.

The central bank had said in its previous bulletin that the economy could return to positive growth (after two quarters of contraction) in the October-December 2020 period.

“Over the month gone by, more evidence has been turned in to show that the Indian economy is pulling out of COVID-19’s deep abyss and is breaking out amidst winter’s lengthening shadows towards a place in the sunlight. First, the National Statistical Office’s (NSO) end-November release delivered a pleasant surprise – the pandemic-imposed retrenchment of the first quarter 2020-21 turned out to be much shallower in the second quarter and the economy is reflating at a pace that beats most prediction’’, the bulletin said.

It added that real GDP growth could break out into positive territory in the third quarter - albeit, to a slender 0.1 per cent.

The report further pointed out that an analysis of 12-months ahead forward earnings shows improvement in the outlook for a large number of companies. Here, sectors like auto and capital goods, which had been hit hard by the lockdown are expecting a turnaround in forward earnings. Similarly, firms in the healthcare, information technology (IT) and fast moving consumer goods (FMCG) sector are sighting stronger earnings outlook. Moreover, intrinsic strength in the manufacturing and services sectors is being built as debt servicing capacity is getting reinforced and leverage is being brought down.

On the other hand India’s farm sector is also forging ahead, backed by path-breaking marketing reforms.