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Prospects are brightening for the economy, achieving escape velocity from the pandemic as the second wave wanes and preparedness for the future remains on war-alert status, according to an article in the Reserve Bank of India’s latest monthly bulletin.
Domestic economic conditions rounded a turning point in August as growth impulses gathered momentum with the progressive opening up of the economy and scaling up of the vaccination drive, per the article “State of the Economy” put together by 21 RBI officials, including Deputy Governor MD Patra.
The authors opined that aggregate demand is gaining firmer ground, while on the supply side, the index of industrial production (IIP) and eight core industries reflect improvement in industrial activity while available high-frequency indicators for the services sector in August point towards sustained recovery.
“Overall, the domestic economic activity shows signs of rebound with the ebbing of second wave,” they said.
The article emphasised that strong growth is witnessed in e-way bills, GST revenue, railway freight, electricity demand and labour force participation rates.
PMI (Purchasing Managers’ Index) future output index remains high for August with easing of Covid-19 restrictions and increased marketing effort. Further, improved global demand reflected in strong export growth supports the domestic recovery.
Inflation trajectory
The authors felt that the trajectory of inflation is shifting down more favourably than anticipated.
“The inflation outcome for August has vindicated the Monetary Policy Committee’s (MPC) call for treating the May price shock as transitory and looking through it.
“The softening of prices of various food items is likely to extend into Q3 (October-December 2021) and contain the upside price pressures stemming from fuel and core prices on headline inflation,” they said, adding that the task now is to consolidate these gains and carry them forward into Q4 (January-March 2022) as well.
The authors noted that India is a price taker regarding fuel prices, which have been broadly aligned over time with international prices. The outlook for core inflation is tied to the fortunes of the Indian economy going forward.
“As pandemic scars heal and supply conditions are restored with productivity gains, a sustained easing of core inflation can be expected, which will reinforce the growth-supportive stance of monetary policy.
“In August, we believe that India passed a turning point which consolidates and thrives come September,” the authors said.
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