GDP to contract in the second quarter too, says RBI2 min read . Updated: 25 Aug 2020, 05:49 PM IST
- The improvement, seen in May and June, seems to have lost steam in July and August. The future is heavily contingent upon evolving intensity, spread and duration of covid-19 and the discovery of the elusive vaccine
MUMBAI: The impact of the pandemic could cause a structural downshift in India’s potential output, with the GDP likely to contract in the second quarter as well, the Reserve Bank of India ( RBI) said in its annual report released on Tuesday.
Potential output is essentially defined as what an economy can produce if it were operating at maximum sustainable employment. The central bank, which on previous occasions has warned that the country’s GDP is set to contract at least in the first half of the current year, said unlike the 2008 financial crisis, which was man made, recovery this time is likely to be different and path more gradual.
"The global crisis occurred after years of robust growth with macroeconomic stability; by contrast, COVID-19 has hit the economy after consecutive quarters of slowdown, RBI said.
"As stimulus is unwound in a calibrated and non-disruptive manner in a post-pandemic scenario, deep-seated and wide-ranging structural reforms in factor and product markets, the financial sector, legal architecture, and in international competitiveness would be needed to regain potential output losses and return the economy to a path of strong and sustainable growth with macroeconomic and financial stability," it said.
The central bank also noted that the contraction in economic activity is likely to continue into the second quarter. The improvement that was seen in May and June seems to have lost steam in July and August due to reimposition of lockdown curbs. The annual report added that the pandemic is likely to inflict deep disfigurations on the world economy. The future is heavily contingent upon the evolving intensity, spread and duration of covid-19 and the discovery of the elusive vaccine.
Post-pandemic, the overwhelming sense is that the world will not be the same again and a new normal could emerge, it said.
The RBI also said government consumption will continue to support current demand while private consumption will drive economic recovery when the impact of covid-19 reduces.
The central bank said, "Indian banking has to be liberated from the risk aversion that is impeding the flow of credit to the productive sectors of the economy and undermining the role of banks as the principal financial intermediaries in the economy."
Asset quality, capital adequacy, and profitability of banks could be affected due to the deterioration in the macroeconomic and financial environment.
"Regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments, deferment of interest payments and restructuring may also have implications for the financial health of banks, unless they are closely monitored and judiciously used," the RBI said.
According to the stress test reported in the July 2020 Financial Stability Report, non-performing assets may surge 1.5 times above their March levels under the baseline scenario and by 1.7 times in a very severely stressed scenario. The system level capital adequacy ratio can drop to 13.3% in March 2021 from its March 2020 level under the baseline scenario and to 11.8% under the very severe stress scenario.
The RBI also reiterated that recapitalisation of public and private sector banks therefore assumes critical importance. It has already advised banks and NBFCs to carry out COVID-19 stress tests and take necessary remedial measures proactively.