Reserve Bank of India Governor Shaktikanta Das. Photo: AFP

India’s central bank said the economy has not moderated to the extent it had during the Covid-19 first wave, but uncertainties remain.

Last year the government imposed a strict countrywide lockdown to contain the spread of coronavirus that led to a contraction of the economy. This time the lockdowns have been localized with state governments allowed to make the final call. However, major cities such as Mumbai, New Delhi, Chennai, Kolkata and Bangalore are facing restrictions.

In its annual report, the Reserve Bank of India said the country’s growth prospects now essentially depend on how fast India can control coronavirus infections during the second wave.

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

The central bank said the Indian economy remained upbeat despite facing pandemic headwinds. “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 said.

The steady level of goods and services tax collections, which remained above the one trillion rupees (US$13.77 billion) mark for the seventh consecutive month in April, suggests that manufacturing and services production has been maintained, it said.

However, the Reserve Bank expressed alarm over the spread of the contagion in the second wave, which has stretched the health infrastructure in terms of capacity to handle a surge of this size and speed. It felt that a collective global effort to fight the pandemic would surely bring better results than individual countries fighting on their own.

Growth outlook

“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% for the year 2021-22 – 26.2% in Q1, 8.3% in Q2, 5.4% in Q3 and 6.2% in Q4,” it said. It should be noted that these numbers are stacked against last year’s low base.

In 2020-21, the Indian economy slipped into a “technical” recession after its growth contracted in two consecutive quarters. In the first quarter, gross domestic product contracted by a record 23.9%, as the economy came to a near standstill due to a two-month-long lockdown in April and May.

This was followed by a contraction of 7.5% in the second quarter.

The Reserve Bank recently approved the transfer of 991.22 billion rupees ($13.67 billion) as a surplus to the federal government. It also decided to maintain the Contingency Risk Buffer at 5.50%.

The central bank has now changed its accounting year to April-March from July-June. Hence the above amount was for the accounting period of nine months ended March 31.

This move is expected to ease fiscal pressure on the government and provide more room to spend amid the second wave of Covid-19.