Economy shows further weakening, needs larger push: Shaktikanta Das at MPC meet

The economy needs a “larger push” as economic activity has shown signs of “further weakening” since June 2019 and several high-frequency indicators have either slowed down or contracted in recent months, Reserve Bank Governor Shaktikanta Das said in the Monetary Policy Committee (MPC) meeting held on August 7.

According to minutes of the MPC meeting released by the RBI on Wednesday, in view of weakening of domestic growth impulses and unsettled global macroeconomic environment, there is a need to bolster dwindling domestic demand and support investment activity, even as the impact of past three rate cuts is gradually working its way to the real economy. The RBI cut the repo rate by an unconventional 35 basis points to 5.40 percent in the last policy review.

“Overall, there is clear evidence of domestic demand slowing down further. Investment activity has been losing traction,” he said. With headline inflation projected to remain within the target over the next one-year horizon, supporting domestic growth by further reducing interest rates needs to be given the utmost priority, Das said. “Given the current and evolving inflation and growth scenario at this juncture, it can no longer be business as usual approach. The economy needs a larger push,” he said.

“Economic activity has shown signs of further weakening since the last MPC meeting in June 2019. Several high frequency indicators have either slowed down or contracted in recent months,” Das said. The RBI Governor said private consumption, which has been the mainstay of domestic demand, has also decelerated. “The slowing down of domestic demand is also reflected in significant moderation in CPI inflation excluding food and fuel; and contraction in merchandise imports,” he said.

Das said the transmission to bank lending rates has been inadequate, though it is expected to improve in the coming weeks and months. Credit growth has slowed down somewhat in the recent period; credit to micro, small and medium enterprises, in particular, remains anaemic, he said.

“The weakening of the global economy … has severely impacted India’s exports …,” he said. BP Kanungo, Deputy Governor, RBI, said domestic growth is also slowing down. “A worrisome aspect of the recent growth slowdown is the moderation in private consumption which constitutes the largest segment of aggregate demand. Rural demand indicators like tractor, motorcycle sales continued to contract in May-June,” he said.

“Urban demand indicators, like passenger vehicle sales, contracted for the eighth consecutive month in June. Commercial vehicle sales also contracted during June. Construction activity indicators weakened with contraction in cement production and slower growth in finished steel consumption in June,” Kanungo said.

Turning to economic activity, Das said total area sown under kharif crops was 6.6 per cent lower as on August 2 than a year ago, with significant catching up taking place in recent weeks. “Industrial activity continued to be weak in May 2019, impacted mainly by manufacturing and mining. In terms of use-based classification, growth of capital goods and consumer durables decelerated. However, growth of non-durables accelerated in May,” he said. The index of eight core industries decelerated in June. Merchandise exports and imports contracted in June. Seasonally adjusted capacity utilisation moderated to 74.5 per cent in Q4 of 2018-19 from 75.6 per cent in Q3.

According to Michael Patra, Executive Director, RBI, the space for monetary policy action has to be calibrated to the evolving situation, especially as the nature and depth of the slowdown is still unravelling and elbow room may be needed if it deepens.