Service Sector Contraction Unprecedented In Indian History: RBI Report

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Service Sector Contraction Unprecedented In Indian History: RBI Report

RBI Annual Report: Service sector contraction unprecedented in India’s history

The Reserve Bank of India has described the contraction in the service sector during 2020-21 as “unprecedented in Independent India’s history”, observing that even during the global financial crisis, it had remained resilient.

“The contraction in the services sector in 2020-21 is unprecedented in independent India’s history. Even during the global financial crisis, the services sector remained resilient. In 2020-21, however, construction suffered in the aftermath of the pandemic due to an inventory overhang in residential housing, coupled with stressed liquidity conditions which restricted new launches. The situation was exacerbated by imposed social distancing norms which led to construction activity in the first quarter of 2020-21 getting reduced by half year-on-year,” the central bank has noted in its annual report for 2020-21.

Industrial sector downturn

On the industrial sector, the central bank said that the gross value added growth in the industry contracted sharply on a year-on-year basis by 7.4 per cent in 2020-21.

“This is the fifth year of sequential deceleration, including two successive years of contraction in the industrial sector. During the first quarter of 2020-21, industrial activity plummeted sharply, registering a contraction of 31.1 per cent. The turnaround in industrial activity since then has been volatile,” RBI has said.

IIP data shows that the contraction was severe in case of consumer durables and capital goods, as consumers shunned discretionary expenditure while firms curbed investment. Cumulatively, the IIP declined by 8.6 per cent in 2020-21. At the sub-sectoral level, however, electricity, gas, water supply and other utility services recorded a growth of 1.8 per cent in terms of gross value added, the central bank has noted further in its annual report.

The decline in industrial activity, it has said, was witnessed across countries. India witnessed the severest downturn and it was also one of the first to revive from contraction in September 2020, along with South Korea and Brazil, though growth remained volatile. The growth was supported by improvement in consumer durables and non-durables, especially consumer electronics and white goods, benefitting from pent-up demand, the report observed.

Hospitality and transport sector

“The contraction was also severe in contact intensive sectors as activities in hotels, restaurants, and passenger transport remained much below pre-Covid-19 levels. There has been a swift recovery in trading activities as evident in the collection of the goods and services tax (GST) and issuance of E-way bills. This has also imparted a boost to freight traffic. The performance of information technology (IT) companies has been better than their counterparts in the hospitality and the aviation segments,” the central bank said.

Housing sector scenario

Referring to the housing sector, the RBI has noted that the “revival in the segment during the second half of FY21 has been sharp with sales almost doubling in the third quarter of the fiscal sequentially, supported by favourable interest rates, adequate liquidity and steep discounts by developers to clear inventory, besides reduction in stamp duty by a few states”. 

The RBI in its forward looking outlook has said that growth prospects essentially depend on how fast India can arrest the second wave of Covid-19 pandemic.

“While the economy has not moderated to the extent during the first wave, the surrounding uncertainties can act as a deterrent in the immediate period. On the supply side, agriculture has proven its resilience, enduring the shock of the pandemic, thus providing support to rural demand and the economy at large,” it has concluded.

In case of services, recovery has been varied, with revival in construction, trade, freight transportation and information technology (IT) related activities. While performance of contact-intensive sectors is still sub-par, it is also improving, the central bank has summed up.

Going ahead, as the vaccination drive picks-up and cases of infections fall, a sharp turnaround in growth is likely, supported by strong favourable base effects, the RBI has expressed hope.

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