As MPC raises growth projections, what makes the panel so optimistic?

The MPC believes that there is growth momentum due to better farm production, government policies to boost capex, improvement in business and consumer sentiment

Contrary to popular interpretation, the monetary policy committee (MPC) did not cut projections for the gross domestic product (GDP) growth but raised it in its September policy review compared to that in the August review.

Given the growth rate of 13.5 per cent in the first quarter, the growth rate would have fallen to 6.6 per cent for the current financial year if the MPC had retained projections for the next three quarters. The panel raised it to 7 per cent by increasing the growth rates in each of the next three quarters. The raise was significant at 50 basis points in the festival-filled third quarter and 60 basis points in the fourth quarter.

The just concluded second quarter would witness only a 10 basis points increase to 6.3 per cent compared to MPC's previous projection.

However, the moot question arose -- can we take MPC's projections about these three quarters at the face value when its first-quarter projection fell short by 270 points? Especially at a time when the panel itself cautioned against external headwinds from geopolitical tensions, tightening global financial conditions and slowing global demand. Also, it raised the repo rate by 50 basis points. Will a hike in the resultant interest rates not have any impact on economic growth?

MPC said firms polled in the Reserve Bank’s industrial outlook survey expect sequential expansion in production volumes and new orders in Q2, FY23, which is likely to sustain through Q4.

The MPC believes that there is growth momentum due to better farm production, government policies to boost capex, and improvement in business and consumer sentiment.

However, as cited above it highlighted external risks due to protracted geo-political tensions, a rise in global financial market volatility and a tightening of global financial conditions.

In fact, external risks have started showing in Indian merchandise exports. These declined 3.5 per cent in September at $32.62 billion. Moreover, imports rose 5.4 per cent to $59.35 billion in the same month. This meant that net trade has widened, which is subtracted from the rest of the components to take out the GDP numbers.

Going forward, external headwinds are going to sharpen much more.

Nouriel Roubini, who correctly predicted the financial crisis in 2008, now said that the US and the rest of the world are about to face an ugly and long recession. Roubini said the S&P 500 could fall by 30 per cent in a normal recession and 40 per cent in a brutal recession.

Roubini expected the next recession to hit in late 2022 and last for all of 2023.

Roubini earned his nickname — Dr Doom — for correctly predicting the 2007-2008 crisis and saying people should expect huge debt ratios for governments and corporations.

He said many zombie countries, shadow banks, banks, corporates, zombie households, and zombie institutions would die.

Roubini warns that recession will drag the global markets down because of debt levels worldwide, and it will be impossible for the Federal Reserve to keep inflation down to 2 per cent.

World Trade Organisation Director-General Ngozi Okonjo-Iweala also said, "I think a global recession — that is what I think we are edging into.”

Next month, the World Trade Organisation (WTO) is expected to slash its trade growth projections for 2022.

In April, the Geneva-based trade body lowered its projection for growth in merchandise trade this year to three per cent from its previous projection of 4.7 per cent.

However, Icra chief economist Aditi Nayar is hopeful on the growth front. She said, "We have maintained our GDP growth forecast for FY23 at 7.2 per cent, given the robust demand for contact-intensive services and the expectations of back-ended government and private sector capex."

She, however, added words of caution -- the heavy rains in recent days pose a downside to the Kharif yields, and flagging external demand may curtail the growth in exports in H2 FY23. 

However, the World Bank recently slashed its estimates for economic growth in India by 100 basis points to 6.5 per cent for the current financial year. It warned that the effect of Russia’s invasion of Ukraine and global monetary tightening will weigh on the economic outlook.