RBI admits GDP forecasts prior to coronavirus outbreak were off the mark

RBI failed to gauge a greater-than-anticipated contraction in gross-fixed capital formation and continuing weak activity, especially in the rural areas.

The Reserve Bank of India, in its April Monetary Policy Committee (MPC) report on Thursday, admitted it had failed to gauge the extent of the slowdown in India, even before the Covid-19 pandemic, primarily due to a greater-than-anticipated contraction in gross-fixed capital formation and continuing weak activity, especially in the rural areas.
 

According to the official data, gross domestic product (GDP) growth for third quarter of 2019-20 (October-December) came in at 27-quarter low of 4.7 per cent. The GDP growth for the second quarter (July-September) was revised upwards to 5.1 per cent from 4.5 per cent. In its October 2019 report, the RBI had projected second quarter growth at 5.3 per cent and third quarter growth at 6.6 per cent.
 

“Actual outcomes in terms of the NSO’s second advance estimates undershot these projections by 20 and 190 basis points in Q2 and Q3, respectively. The downward surprise in Q2 stemmed from a stronger-than-anticipated drag from gross fixed capital formation and marginal weakness in private final consumption expenditure. In Q3, projection errors emanated mainly from a steep unanticipated contraction in gross fixed capital formation, which was the deepest in the new series of GDP,” it said.
 

“The deterioration in aggregate demand conditions in 2019-20 was exacerbated by contraction in investment, and moderation in government expenditure in H2. On the supply side, agriculture and allied activities accelerated, buoyed by the late surge in south-west monsoon rainfall and bountiful north-east monsoon precipitation,” the report said.

“However, industrial growth decelerated, led by a slowdown in manufacturing activity. Services sector activity moderated, pulled down by a slowdown in construction; trade, hotels, transport and communication; and public administration, defence and other services,” the report stated.

“The Covid-19 outbreak and the subsequent lockdown are expected to bring down the aggregate demand drastically, both in rural and urban areas. The government has announced a slew of measures to offset the adverse impact on rural demand. However, rural demand is expected to go down further at least in the near future.”