Private consumption hit

By Nagaland Post | Publish Date: 8/30/2020 12:53:48 PM IST

 RBI income slumps 29 percent. Gives Rs 57.128 crore bonus

The pandemic is devastating world economy. Consumption shock is severe. Like the World Bank, RBI is less hopeful of coming out of contraction and even with higher government spending recovery may be delayed. 

The RBI annual report 2019-20 indicates negative growth this fiscal. It is critical of stricter sporadic localised lockdowns (LD) disrupting economic activities. Fall in its income leads to bonus payment of Rs 57.128 crore to central government, lower by 67.5 percent from Rs 1.76 lakh crore last year. 

Overall the world economy is marked by fall in stock prices, galloping inflation – 15 percent in developed OECD countries. The virus is aggravating conditions. The US is witnessing many demonstrations as cost of living spirals.

The RBI report is concerned about firming up of inflation caused by disruption of supplies. It says that heightened volatility in financial markets could also have a bearing on inflation and may affect households. It wants the monetary policy to keep a constant vigil on price movements. Official data say retail inflation touched 6.93 percent in July.

India is having difficult situations and is likely to take time to regain pre-covid19 levels despite a small recovery in May and June, the report says. The re-imposition of partial and localized lockdowns is regressive. It is prolonging growth contraction as investments remain anaemic and dents consumer confidence. The RBI expects government’s rural-focused employment schemes to provide a fillip to rural incomes. In short, the rural sector is supposed to give a push to the growth as wages contract. 

Even the state governments squeezed by covid19 and delayed release of GST payments since April, amounting to about Rs 2.35 lakh crore, according to finance minister Nirmala Sitharaman, have put on hold payment of employees’ salaries. Many other government organisations are also in a similar situation. A number of states, including Maharashtra, Punjab, Bihar, Karnataka, Madhya Pradesh, Tripura, and Telangana have delayed salary payments. The private sector has either cut up to 70 percent of wages or sacked lakhs. 

The farmers are not getting prices for their produce, markets are agog. Wheat is being sold at around Rs 1600-1700 a quintal against MSP of Rs 1725. They are getting half the price of last year for corn and millet. 

The RBI contention that despite contracting wages and falling grain prices mere government job schemes can raise rural incomes lacks clarity.

The report possibly realizes it and calls for managing food grains output at 296.65 million tonnes, a surplus. Horticulture also reached an all-time high of 320.48 million tonnes. However, these have not increased farmers’ income. Owing to covid19 restrictions it caused supply side problem and depressed prices for farmers as they could not reach far-off markets. The annual report has enumerated EC Act and Farmers’ Produce Trade and Commerce  (Promotion and Facilitation) Ordinance 2020 and Farmers (Empowerment and Protection) Agreement on Price Assurance and farm Services Ordinance 2020 to better the conditions of the famers in an effective and transparent manner.

This is affecting demand. The consequence is being noticed in production fall as the IIP numbers recently demonstrated. The contraction is up to 20 percent or more in GDP in the first quarter of 2020-21 due to corona lockdown.

“Private consumption has lost its discretionary elements across the board, particularly transport services, hospitality, recreation and cultural activities”, the RBI says. The central bank warns that the situation is unprecedented as it sees an overall thaw – ‘retrenchment in activity’.

The RBI says that the recovery will happen when the non-discretionary spending – expenses that people cannot do without like food or essential items -lead the way till a durable increase in disposable incomes enables discretionary spending like vacation, and entertainment. In short, it is waiting for people to have larger disposable or spare money with them. 

The RBI survey for July indicates that consumer confidence has fallen to an all-time low, with a majority of respondents reporting pessimism about the economic situation, employment, inflation and income.

Some new equities have also come to the fore. White collar employees can work from home while essential workers have to work on site, exposed to risks of infection. In areas like hospitality, hotels, restaurants, airlines and tourism, employment losses are severe. “The poorest have been hit the hardest”, the report says.

The report is not buoyant about urban consumption either. It has suffered a bigger blow with drop in vehicle and consumer durable sales dropping to one-fifth and one-third of a level a year ago and air traffic grounding to a halt. Marginally the rural sector is doing better, it says. 

The LDs are thawing activities. The total e-way bills issuance till the first ‘unlock’ in June, an indicator of domestic, increased by 70.3 percent in June on a month on month (m-o-m) basis. In July, it rose by 11.4 percent m-o-m, 7.4 percent lower than a year ago.

Having said that private consumption is not boosting demand, the report wants government to increase consumption. It may be a good suggestion but is fraught with many risks as government income is hit. If it increases borrowing, taxes would rise further and so would inflation. It’s a double-edged sword.

The RBI income itself declines by 29 percent. Its gross total income falls to Rs 149.672 crore as compared to Rs 194,036 crore in 2018-19. Its total expenses are Rs 92,450 crore, including risk provision of Rs 73,615 crore. Its liabilities have also increased. 

The central bank has underlined the challenges for the central and state governments with limited headroom. It results in major squeeze, cuts in capital expenditure and consequently hits growth.

Large government debts and contingent liabilities incurred during pandemic are challenges for fiscal roadmap. It calls for credible consolidation plan for debt reduction and deficit over a medium term. 

Its solutions aim at more centralization of authority like the GST Council in respect of land, labour and power to drive structural reforms and spreading development widely. The statement is a contradiction in itself as of late the GST payment delays have thrown states in to severe problems.

The RBI needs to rethink about monetization of assets in steel, coal, power, railways and privatization of ports. These would not boost demand, a prerequisite for the turnover in economy. Finally, mini LDs have to end for fast recovery.

Shivaji Sarkar

Launched on December 3,1990. Nagaland Post is the first and highest circulated newspaper of Nagaland state. Nagaland Post is also the first newspaper in Nagaland to be published in multi-colour.

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