Officials back Dholakia’s objection to RBI’s growth assessment
As Advance Estimates by the statistics office for growth in gross value added (GV) came much below the Reserve Bank of India’s (RBI) projections for 2017-18, officials in the Central Statistics Office (CSO) point to an assessment by a Monetary Policy Committee (MPC) member who said the central bank had overestimated the numbers, ahead of the December policy review.
Another official in the finance ministry said the assessment by the member, R Dholakia, was correct so far as the issue of cut in the policy rate was concerned.
According to minutes of the MPC meeting in December, Dholakia said RBI overestimated growth. While the CSO puts GVA growth at 6.1 per cent, RBI had projected 6.7 per cent.
Dholakia, a professor of economics at IIMAhmedabad, had pitched for a 25 basis points (bps) rate reduction in the December meeting. He had also predicted the fiscal deficit mightexceed the target of 3.2 per cent of Gross Domestic Product this year, with nominal growth to grow slower than expected. Inflation remains under reasonable control, he had argued. However, RBI had retained the policy rate at the same level.
Senior officials in the government say Dholakia is the only one to have correctly gauged the economic situation and that policy rate cuts are required to spur the economic growth engine.
“RBI growth estimates seem an overestimate. Only Dholakia’s assessment in the MPC is on the mark. There should have been a rate cut and there needs to be a rate cut,” said a senior official.
This brings back the divide between government and RBI over rates. Chief economic adviser Arvind Subramanian had in the second volume of the Economic Survey for 201718 said RBI got its inflation projection wrong by more than 100 bps for six of the past 14 quarters.
“I am not in agreement with the assessment of RBI for both the CPI (consumer price index) inflation and economic growth prospects in the near term…The real cause of concern right now is economic recovery and its slow pace. Fiscal space is more or less exhausted but the space for monetary boost has fortunately been available now for a relatively long period.” Dholakia had said, according to the minutes of the MPC meeting.
In the August 2 meeting, when the policy rate was reduced by 25 bps, Dholakia had pitched for a 50 bps reduction.
The government breached the fiscal deficit target given in the Budget for 2017-18 by November itself at 112 per cent of its ~5.5 trillion target, the highest deviation in the first eight months of a financial year since 2008-09, year of the global financial crisis. The Centre also announced it would additionally borrow ~500 billion from the market.
Dholakia had said in the meeting that the fiscal deficit as percentage of GDP might exceed the target because nominal GDP would grow much slower than the assumed number (11.75 per cent) in the Budget on account of lower inflation and substantial slowing in real growth. The CSO has estimated nominal GDP growth at 9.5 per cent for FY18. Everything remaining constant, the fiscal deficit will go up to 3.3 per cent of GDP on account of nominal GDP slowdown.
“The expectation of growth recovery by RBI during the June-September quarter turned out to be a substantial overstatement,” Dholakia had said in the meeting.
As against RBI’s expectation of 6.4 per cent, the growth of real GVA during the quarter turned out to be 6.1 per cent. “Yet, RBI has not revised its growth forecast from the earlier 6.7 per cent for 2017-18. This implies RBI now expects higher growth of 7 and 7.8 per cent, respectively, in the third and fourth quarters of 2017-18. This is highly improbable without any policy rate cut because fiscal space is practically non-existent,” he had further said.