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Status of the Economy Report, recently published by the Reserve Bank of India, on January 21, 2021, has brought in a refreshing waft of breeze in the otherwise gloomy environment that had engulfed the economy during the better part of 2020. Covid-19 turned out to be a worldwide pandemic affecting around 81 million people and causing 1.8 million deaths. The two World Wars and the Spanish Flu, all twentieth century events, took more lives than Covid-19. But this pandemic changed the daily lives of the global populace in an all-pervasive manner.  

As per the RBI report, there is some positivity in the system in terms of growth and liquidity. First, India has so far succeeded in ducking the second wave of Covid-19. Moreover, since mid-September, India has successfully bent the curve. By the end of 2020, the number of active cases had fallen to 2,54,254 from a peak of 10,17,754 on September 17. The recovery rate in India has improved to 96.1% and the mortality rate came down to 1.4%. Second, after a hiatus of four months during which total expenditure of the central government went into contraction or remained muted, it re-joined the celebration of the recovery in November 2020, surging by 48.3% on a year-on-year (y-o-y) basis. In fact, RBI wanted a calibrated exit from the ultra-loose liquidity policy that it has been pursuing since March 2020. RBI was of the view that it should resume normal liquidity operations in view of the financial parameters easing by few notches. In line with that, the mid-January RBI action of conducting reverse repo sucked out `2 trillion liquidity from the system. 

The RBI report also stated that the worst is now behind us and recent high frequency indicators suggest that the recovery is getting stronger in its traction and soon, to quote Shakespeare, the winter of our discontent will be made glorious summer. It also envisages that the shape of the recovery will be V-shaped. On January 16, the country launched a mass vaccination drive. Having almost 60% of the world’s vaccine production capacity in its fold and a rich experience of mass inoculation drives against polio and measles, the country is expected to have a comparative advantage. If successful, it will tilt the balance of risks upwards.

The consumer confidence index is also poised for an uptick as built up has been observed in sectors like housing and FMCG and the labour market is gradually coming out from the Covid- 19 induced dislocation. This is expected to improve from January 2021, peak in July and continue till September ahead of the next festival season.

Also, going forward, two positive features are going to shape the fiscal landscape in H2. First, the general government GFD-GDP ratio is likely to moderate to 10.4% (within a 50% confidence band of 9.7-10.9%). This development will be revenue-driven as the war effort of H2 bears fruit and receipts return to positive territory. Second, the quality of the fiscal deficit is also likely to be better in H2 as a substantial part of investment-oriented stimulus under Aatma Nirbhar 2.0 and 3.0 (announced in October and November 2020, respectively) is expected to fructify in this period.

The RBI report has also touched upon the change in the lives of people brought in by the pandemic months. A distinct pattern of preference has clearly emerged. A shift towards digital payments is becoming evident this year and with increasing e-commerce penetration, the growing footprint of BigTech in the payment space is increasing which in turn is increasing the competitive pressure on banks to upgrade their payment eco-systems. Incentives such as cashbacks, discounts on e-commerce portals, easy EMI and buy now, pay later schemes have built a wider customer base. They have also promoted increasing use of digital payments and are driving up transaction volumes in retail payment systems, especially on the UPI. As competition in the payments industry is set to intensify - with newer entrants offering greater incentives for people to pay digitally - India may emerge from the pandemic more digital than ever before.

(Author works for Peerless Financial Services Ltd. Views expressed are personal.)