THE GIST of Editorial for UPSC Exams : 28 August 2020 Long road ahead (Indian Express)

Long road ahead (Indian Express)

Mains Paper 3: Economy
Prelims level: RBI monetary policy
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context:

The Annual Report of the Reserve Bank of India, released on Tuesday, affirms that the recovery from the current crisis will be a painful and protractedprocess.
Leading economic indicators do suggest that the economy has bounced back from the lows observed in April.
But the report also corroboratesthe view that economic activities are plateauing at lower levels, and that the normalisation of activities to pre-COVID levels is unlikely in the near-term.
“The upticks that became visible in May and June after the lockdown was eased in several parts of the country, appear to have lost strength in July and August, mainly due to reimposition or stricter imposition of lockdowns,” it noted.
This implies that though the pace of contraction in activities does appear to have eased considerably since the easing of the lockdown restrictions, the central bank now expects the economy to continue to contract in the second quarter of the current financial year as well.

Prognosis:

The report offers a grim prognosisof the underlying drivers of growth.
On the consumption side, the data points to a remarkable decline in household financial liabilities, indicating that in line with the corporate sector, households in India have also begun to deleverage.
Household financial liabilities fell to 2.9 per cent of gross national disposable income (GNDI) in 2019-20, from 4 per cent in 2018-19.
And this was before the COVID-19 pandemic struck.
Rising income uncertainty stemming from the subsequent job and income losses may well have accelerated this trend, and led to a rise in precautionary savings, dimming the prospects of a revival in private consumption in the near term.
As the report notes, “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.”
On the investment side, the prospects of a pick-up in the private sector capex cycle also appear to be bleak.
Companies have utilised the cash flow freed up due to the reduction in the corporate tax rates to meet their loan obligations, and to build up their cash reserves, indicating limited appetitefor launching fresh investment.
A risk averse household and corporate sector, both in the midst of a deleveraging exercise, underscorethe need for greater public sector spending to revive the economy.
As the RBI also notes, public investment funded by the monetisation of assets, could “revive and crowd in private investment.”

Uncertainty:

The central bank’s continued reluctance to provide any estimate of economic growth for this year underlines the lingering uncertainty.
National Statistics Office (NSO) will release its estimates of growth for the first quarter, indicating the extent of the slump during the period, early next week.
RBI should provide its own assessment of the economy, and how it sees economic activity shaping up over the medium term, to help guide policy-makers on the future course of action.

Conclusion:

RBI points to bleak prospects for consumption and investment in near term, underscores need for government support
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Prelims Questions:

Q.1)With reference to the 6th Round Table of ASEAN-India Network of Think Tanks (AINTT), consider the following statements:

1. The theme of the two day Round Table was 'ASEAN-India: Strengthening Partnership in the Post COVID Era'.
2. It was established at the 7th ASEAN-India Summit in Thailand in 2009 to provide policy inputs to Governments on future direction of cooperation.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C