BackIndia's slowdown could be soft patch mutating into a cyclical downturn, says RBI Annual Report
But the RBI noted that there are still structural issues in land, labour and agricultural marketing and they need to be addressedThe central bank also cautioned that a broad-based cyclical downturn is underway in several sectors
PremiumMumbai: While stating that it is difficult to diagnose the nature of India’s slowdown, the Reserve Bank of India in its 2018-19 annual report said that it could be a soft patch mutating into a cyclical downturn.
“The diagnosis is difficult; these conditions are hard to disentangle cleanly, at least in the formative state," the central bank said in the report released today.
According to government data, the Indian economy grew at its slowest pace in the last five years at 5.8% in the quarter ended March.
According to RBI, the recent deceleration could be in the nature of a soft patch mutating into a cyclical downturn, rather than a deep structural slowdown. Nonetheless, there were still structural issues in land, labour, agricultural marketing and the likes, which need to be addressed, it said.
RBI cautioned that a broad-based cyclical downturn was underway in several sectors – manufacturing, trade, hotels, transport, communication and broadcasting, construction, and agriculture.
“It is important to note, however, that trend growth has witnessed slight moderation since 2016-17, contributed mainly by the services sector, especially trade, hotels, transport, communication and broadcasting, and financial, real estate and professional services," it said.
This response, RBI said, will determine the policy responses - illustratively, a soft patch can be looked through, while a cyclical downswing will warrant counter-cyclical actions in terms of monetary and fiscal policies, but a structural slowdown will need deep-seated reforms.
“As mentioned earlier, 2018-19 turned out to be a high-wire year in terms of the unanticipated nature of shifts in macroeconomic and financial conditions, and their sheer magnitude. Sifting through these eventful developments for underlying drivers could provide insights into the current state of the economy and policy perspectives in that context," said RBI.
The annual report pointed out that throughout the year, protectionist policy pronouncements and actions in the form of labelling, bilateral tariff escalations, sanctions and retaliations dominated the global political arena.
According to the central bank, these dealt a body blow to world trade, roiled financial markets and posed risks to macroeconomic prospects of several economies, advanced and emerging alike, that have sought to employ the engine of trade to integrate into the global economy.
“They also fuelled an animated debate on the end of globalisation. Yet, the unfolding of events during the year demonstrated that the world remains coupled, or at least uniformly vulnerable to global shocks," it said.
Macroeconomic outcomes in the first quarter of calendar year 2018 seemed to indicate that the global economy was on an extended expansionary phase, it said.
“Crude oil prices rose to confirm expectations of robust demand. Normalisation of ultra-accommodative monetary policy gathered advocacy and even some traction in the form of interest rate increases and some balance sheet contraction by the Fed and tapering down of quantitative easing (QE) by the European Central Bank (ECB)," it said
The central bank pointed out that the consequent stampede of capital flows out of emerging markets did not distinguish between jurisdictions, including between economies that were on high growth trajectories and those emerging tentatively out of recessionary conditions.
“Fundamentals did not seem to be the main determinant of capital flows," said RBI.
According to the central bank, another conduit through which trade wars and other sources of global spillovers impacted India during 2018-19 was the intertwining of the finance and confidence channels.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
