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 expecta
tion 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 of the virus and the relatively slow progress in vaccination,” it added.
Till Thursday night, India had fully vaccinated 45.6 million people, and partly vaccinated another 132.5 million, covering almost 19% of the eligible population (those over the age of 18 years). The UK has vaccinated almost 60% of its adult population and the US, over 50%.
MPC does refer assingly in passing to weak demand in the context of inflation -- it has revised downward the projections of consumer inflation for the four quarters to 5.2%, 5.2%, 4.4% and 5.1% from the previous estimate of 5.2%, 5.4%, 4.7%, and 5.3%. Elsewhere, it speaks of demand continuing to be resilient. “Rural demand remains strong, and the expected normal monsoon bodes well for sustaining its buoyancy, going forward,” it said . “Urban demand has been dented by the second wave, but adoption of new Covid-compatible occupational models by businesses for an appropriate working environment may cushion the hit to economic activity,” it added. MPC’s reference is to the rolling lockdowns instituted by the states this year, allowing at least industrial activity to continue, unlike last year’s national lockdown for 68-days, which curbed most activities for much of the period. Indeed, this has been the basis for even securities firms and banks to remain sanguine about growth. But some experts see it differently.
“It is optimistic to assume that the lockdown’s pain in the first quarter will not percolate beyond it. We should remember that this is a double whammy -for most businesses in terms of lost revenues and, for workers, a squeeze on employment and wages,” said Himanshu, an associate professor of economics as Jawaharlal Nehru University who goes by only one name. “Unless there is a strong demand side stimulus, the economy will only go from bad to worse.”
It’s possible the shock of the second wave – India saw a total of 15.95 million infections, or 56% of all infections it has seen to date, in April and May, and 168,927 deaths, or 49% of the deaths to date from Covid-19 – hasn’t registered on most forecasting models, said another expert. “Most GDP projections we are seeing today, including the RBI’s are based on models which cannot account for shocks such as the one due to the second wave of infections. They assume some sort of a time-series continuity, which might not hold,” said Pranab Sen, former chief statistician of India.
A private sector economist at a leading private sector bank said on condition of anonymity that beyond a point there is no use in looking at year-on-year or quarter-on-quarter numbers. The key question is what the MPC has defined as reviving and sustaining “growth on a durable basis” in its latest resolution; as long as that durable growth is not defined, policy uncertainty, especially in the bond markets is likely to continue, as they will keep pushing for policy normalisation creating pressure on RBI. The accommodative monetary policy cannot continue forever, he added. A note by Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, was circumspect about a strong revival in the second half of the year. “Interestingly, though RBI has reduced growth projections for Q1 and Q2 it has enhanced projections for Q3 & Q4, specifically Q3 by a large margin. RBI, thus, clearly expects a vaccination driven recovery post September and that should help to normalise economic activity quickly.