Tag: economy

MUMBAI: Preliminary estimates show a substantial waning of the household financial savings rate to 10.4% of GDP in the second quarter of 2020-21 from a high 21% in the preceding quarter, as households switched from an “essentials only” spending to discretionary with the gradual reopening and unlocking of the economy, a Reserve Bank of India (RBI) report showed on Friday.
However, the report also asserted that optimism is taking hold among households, businesses, investors and markets, and India is likely to decouple from other emerging economies that face rising financing costs and a debt pile-up.
“Households’ financial savings rate might have fallen further in Q3:2020-21 with the intensification of consumption and economic activity,” the report said.
The state of the economy report said that there is an urgency to resume high growth, and incoming data point to even contact-intensive services, such as personal care, recreation and hospitality gathering traction and pace. This, even as agriculture crosses production highs in various crops and in horticulture, and manufacturing stops contracting.
It said the Covid-19-induced spike in household financial savings rate in the first quarter of 2020-21 waned substantially in the second quarter in a counter-seasonal manner. While households’ deposits and borrowings picked up, their holdings of currency and savings in mutual funds moderated. Increased household consumption, particularly its discretionary component, could be attributed to resumption in economic activity following the easing of lockdown, it said.
“Going forward, optimism on account of mass vaccination is expected to further boost consumption demand and work further towards restoration of the pre-pandemic spending and saving pattern,” the report said.
The report also warned that central banks will go beyond their conciliatory “open mouth operations” if their stated stances are challenged. This is in the context of bond investors globally shunning auctions on expectations that yields will rise. “Globally, policies will seek to stimulate, but markets will stare at tea leaves and ghosts of tightening of the past — neither growth nor inflation hard data support market movements so far,” the report said.
It said India is poised on the cusp of two tipping points. “First, there are ominous signs that infections are rising. A second wave? Time will tell. On the other hand, vaccinations have moved beyond health workers to senior citizens, but at 3.3 crore as on March 16, the entire process needs to be speeded up,” the report said.
Going forward, the vaccination drive and flattening of the infections curve will help improve consumer sentiment, boost business spirits and make the digital payments industry the key driver of the post-Covid revival agenda as it ushers in a transformation in “how we work, learn, shop, pay and live”.
The report also said India is likely to decouple from other emerging markets despite debt service accounting for 25% of Budget revenues. According to the report, India is different because the average maturity of government debt is 11 years, which reduces refinancing risks. Another advantage is that most of the public debt is held in India and is less vulnerable to capital outflows. “Also, India has growth credibility — the average rate of interest on public debt is less than the growth rate of the economy,” it said.
The report pointed out that, even as countries rush to vaccinate and struggle with resurgent and mutant strains, the lingering effects of the slowdown of global economic activity in Q4:2020 are beginning to fade. “It is more likely now than before that the global economy will regain lost momentum in Q2,” it added.
In 2021, domestic inflation will likely ease after June, but it will be higher than in prints because of statistical base effects of high inflation a year ago, it said.