The tapering of the Covid-19 second wave, coupled with an aggressive vaccination push, has brightened the near-term prospects for the Indian economy, with the 27-factor ‘now casting model’ estimating the real GDP growth in April-June at 21 per cent, according to an article in the Reserve Bank of India’s monthly bulletin.

The RBI, in its June monetary policy review, had projected FY22 first quarter real GDP growth at 18.5 per cent.

“The vaccination drive is gathering speed and breadth... mobility is rising and workplaces are closing on to normal attendance. This is corroborated by the jump in advance tax payments in June and in e-way bills. Power consumption is recovering from a soft patch. Freight transported by the Indian Railways has... maintained a rising profile through the second wave,” an article put together by 21 RBI officials, including Deputy Governor MD Patra, read.

Uptick in payments

All payment modes have registered an uptick in volumes in June, a forerunner to a revival of business and consumer confidence, it added.

“The virus is retreating... offering a brief window of respite. This opportunity must be seized to (a) prepare for a possible third wave; and (b) renew our tryst with the interrupted recovery,” the authors suggested in the article, State of the Economy .

Recovery interrupted

While the near-term prospects have brightened for the economy, the authors cautioned that it is struggling to regain the momentum of recovery that had started in the second half of 2020-21 but was interrupted by the second wave.

The authors observed that even with a 9.5 per cent GDP growth (RBI’s projection for 2021-22), there will be a substantial slack in the economy and demand pressures may take more time to become evident.

“While several high frequency indicators of activity are recovering, a solid increase in aggregate demand is yet to take shape. On the supply side, agricultural conditions are turning buoyant with the revival in the monsoon, but the recovery of manufacturing and services sectors has been interrupted by the second wave,” the article said

Supply shocks

The authors said that inflation is being driven largely by adverse supply shocks due to disruptions caused by the pandemic, including increases in margins and taxes.

“There are also specific demand-supply mismatches as in the case of protein-rich food items, edible oils and pulses, which are being addressed by specific supply-side measures. But more needs to be done,” they said. The article noted that headline CPI (consumer price index) inflation had eased a tad to 6.26 per cent in June 2021, after the 2.1-percentage-point surge in May.

The article observed that elevated international commodity prices, especially of crude oil, are also imparting cost-push pressures. These factors should ease over the year as supply-side measures take effect.

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