RBI cuts 2021-22 GDP growth forecast to 9.5%

The Reserve Bank of India (RBI) expects the now ebbing second wave of the coronavirus disease pandemic in India to have only a small (1 percentage point) impact on the economy, and, in fact, has projected that GDP growth will be faster than previously estimated in the third and fourth quarters of the year -- likely the impact of the ongoing vaccine drive. On Friday, the Monetary Policy Committee of RBI, kept the policy rate unchanged, indicated that it would continue to do whatever is needed to support growth, and announced that it would pump in another ₹1.2 lakh crore of liquidity into the system this financial year through government bond purchases, but it was its take on the economy that everyone was waiting for.

The numbers seemed to suggest that RBI believes the impact on the economy of the brutal second wave of Covid-19 in the country to be transient. It has projected growth in 2021-22 at 9.5%, down from its previous forecast of 10.5%. It expects growth in the four quarters of the year to be 18.5%, 7.9%, 7.2% and 6.6%. Its previous estimate was 26.2%, 8.3%, 5.4% and 6.2%. Put otherwise, the biggest hit to GDP in expected to be in the April-june quarter and the economy is expected to perform better than expected in the second half of the year. The Indian economy contracted by 7.3% in 2020-21, better than the expectation of a 8% contraction on the back of a strong recovery in January and February, but the surging second wave halted that in its tracks.

MPC’S projections are in keeping with the views of chief economic adviser, Krishnamurthy Subramanian, who said on June 3 that India’s economic recovery will start from July onwards and the ongoing vaccination drive can lessen the impact of the pandemic. That’s the consensus view among banks and securities firms too; a Bloomberg poll last week came up with a median estimate of 10%, lower than a previous median estimate of 10.5%. But independent economists expressed scepticism over RBI’S projections, saying that MPC seems to have underestimated the demand side headwinds from the second wave.

The latest projections mean that GDP in the first half of 2021-22 will be ₹3.8 lakh crore less than what it was in 2019-20. This does not bode well for festive demand in the third quarter.the first quarter GDP numbers for 2021-22 have seen the sharpest downward revision between RBI’S April and June projections; from ₹34 lakh crore to ₹31.2 lakh crore. The September quarter will see a marginal reduction from ₹35.7 lakh crore to ₹35.6 lakh crore. For the December and March quarters, the latest GDP projections are ₹0.7 and ₹1.3 lakh crore higher than what they were in April.

While the MPC has not made a direct reference to India’s vaccination drive, it has highlighted a growing asymmetry in the global economy. “The global economic recovery has been gaining momentum, driven mainly by major advanced economies (AES) and powered by massive vaccination programmes and stimulus packages,” the MPC resolution said. “Activity remains uneven in major emerging market economies (EMES), with downside risks from renewed waves of infections due to contagious mutants.