The economy is not slowing down for want of easy credit. There is enough liquidity sloshing around in the system already. Another rate cut by the Monetary Policy Committee of the Reserve Bank of India would have had little or no impact on the state of the economy. Therefore, the MPC did well at its meeting on Thursday to leave the rates unchanged. The repo rate remains at 4 percent; reverse repo rate at 3.35 percent and the bank rate at 4.25 percent. The MPC had left the rates untouched at its last meeting in Mid-May as well. The ability of the bank rate to rev up the economic engine is limited. Other vital factors come into play. And those currently are not very conducive to growth. Although RBI Governor Shaktikanta Das at the end of the meeting on Thursday said that there was still space for a further cut but it was ‘important to use it judiciously’. Consumer Price Inflation had come down from 7.2 percent in April to 6.1 percent in June. The real interest rates are now in the negative zone with savers in institutional instruments and savings banks accounts feeling the pinch. Diversion of savings into gold and real estate seems tempting at the current rate on bank savings, but these have their own risks of sudden boom and bust cycles. Disruption in supply caused by the prolonged lockdown was a major factor for the rise in CPI. Even now things were not normal with local lockdowns still impacting supplies in various geographies and sectors of the economy. The MPC is tasked to keep the CPI at 4 percent give or take 2 percent on either side. It expects the food prices to ease further once the bumper kharif crop is in. Due to good monsoons there has been a record sowing this year. Indeed, one sector that has done well in the current slowdown is agriculture with record sales of fertilisers and agro chemicals. In fact, rural employment has picked up during the pandemic while in the urban areas it is yet to attain the pre-lockdown levels. The lower employment in urban and semi-urban centres also indicates the sluggishness in the manufacturing and service sectors while in the rural areas the MGNREGA has seen record registrations. The overall state of the economy, however, remains sluggish. Goods and Services Tax collections in July were lower by about 15 percent over the same month last year due to wide-pervasive disruption with local lockdowns still in place in several urban clusters. The auto sector has picked up a little but not enough to absorb the full installed capacities of manufacturing units. Retail sector is in the grip of a severe slowdown. Despite the reopening of markets customers are still afraid to venture out. Hospitality and entertainment sectors remain under great stress with several States yet to allow hotels and restaurants to reopen. And where the restaurants have reopened, as in the national capital, business is slow to pick up due to mandatory conditions to maintain social distance in seating and service operations. In the aviation sector, the country’s largest private airline declared a record Rs. 2,000-crore loss in the last quarter due to the pandemic-related disruptions. Other private operators too reported losses and lay-offs.
Meanwhile, even before the public sector banks could clean up their balance-sheets and make due provisioning for the old non-performing assets, the COVID-19 disruption has added further to their woes. After declining from 9.3 percent in September last to 8.5 percent this March, the gross non-performing assets of the scheduled commercial banks have risen significantly. A stress test by the RBI showed that at the end of the current financial year the NPAs could increase to 12.5 percent. Moratorium on loan payments due to the pandemic is bound to worsen the situation for the banks. Once the moratorium ends, there would be further bankruptcies and loan write-offs due to the slow economic revival. A 9 percent contraction in the economy is on the cards this year. With the revenue collections slipping and expenditure of governments rising sharply, and space for taxing the haves shrinking, we seem to be in for very tough times ahead.