Economic recovery is underway despite headwinds: RBI Annual Report

The Indian economy is relatively better placed to strengthen the recovery that is underway and improve macroeconomic prospects, going forward, even as the geopolitical conflict in Europe threatens to overwhelm the global economy and its constituents, according to the Reserve Bank of India.

Referring to the prospects for agriculture and allied activities brightening at this juncture on the prediction of a normal monsoon, the central bank, in its latest annual report, observed that early indicators point to revival of economic activity across other sectors that needs to be assiduously nurtured in order to boost consumer and business confidence and private investment.

Capacity utilisation in several industries is moving closer to normal levels, although rising input costs and persisting supply bottlenecks, for instance in semiconductors for the automobile sector, may impede or delay a fuller recovery, the report said.

With the lessons of the experience of 2021-22, contact-intensive sectors are expected to rebound over the year ahead, with positive implications for the workforce and for consumption demand, per RBI’s assessement.

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The report noted that the year gone by brought many challenges, but a recovery is underway in spite of headwinds.

The central bank observed that future path of growth will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within the target while supporting growth and targeted fiscal policy support to aggregate demand, especially by boosting capital spending.

Undertaking structural reforms to improve India’s medium term growth potential holds the key to secure sustained, balanced and inclusive growth, especially by helping workers adapt to the after-effects of the pandemic by reskilling and enabling them to adopt new technologies for raising productivity.

The RBI highlighted that longer-than-expected supply chain bottlenecks, elevated freight rates and the upsurge in global inflation amidst escalating geopolitical tensions pose significant risks.

“Although direct trade and finance exposures in the context of the ongoing conflict are limited, elevated crude oil prices can widen the current account deficit while foreign portfolio investors may remain risk averse towards Emerging Market Economies (EMEs), including India,” cautioned the central bank.

Nevertheless, robust reserve buffers, a strong FDI (foreign direct investment) pipeline and proactive policy measures towards supporting merchandise exports and participation in Global Value Chains should help the economy withstand adverse global spillovers.

“Emerging market and developing economies (EMDEs) are bearing the brunt of global spillovers, despite being bystanders.

“Capital outflows and sizeable currency depreciations have tightened external funding costs, pushed up debt levels and put their hesitant and incomplete recoveries in danger,” RBI said.

The report said the inflation trajectory going forward is subject to considerable uncertainty and would primarily depend on the evolving geopolitical situation.

Sharp movements in global commodity prices are having a significant bearing on food inflation dynamics in India, it added.

Though record foodgrains production and forecast of a normal south-west monsoon augurs well for food inflation, heightened uncertainty around global food prices arising from geopolitical risks might offset these positive domestic impulses, especially via elevated prices of wheat, edible oil, feed costs and key agriculture inputs like fertilisers.

Moreover, volatility in the prices of international crude oil and key raw materials and intermediates, together with global supply chain disruptions, may push up input cost pressures.

In particular, a scenario in which crude prices persist above $100/barrel poses a major upside risk in terms of re-igniting second-round effects across manufacturing and services prices.

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