The Reserve Bank of India (RBI) on Thursday reduced its annual economic growth forecast to 5 per cent, from 6.1 per cent it predicted in October.
In its December 2018 meet, the monetary policy committee (MPC) had predicted that gross domestic product (GDP) would grow at 7.5 per cent in FY20. This indicates an admission of the severity of the current economic slowdown by the central bank.
But more importantly, Governor Shaktikanta Das indicated that the onus to arrest the slowdown lies in the fiscal policy and that the “government may initiate some more counter-cyclical fiscal and other measures to arrest the slowdown”.
The MPC said rising inflation and incomplete transmission prompted it to “pause” before any further rate cut. But it said forces driving up inflation “appear to be transient” due to unseasonal rains and damage to the standing kharif crop.
The committee revised the consumer price index (CPI) inflation projection upwards to remain between 5.1 and 4.7 per cent for the period from October 2019 to April 2020; a range higher than the 4.6 per cent seen in the former.
CPI inflation, however, would moderate below the medium-term target of 4 per cent by September of 2020, the governor’s statement said.
Urban food inflation touched 10 per cent in October, raising alarms. Rural inflation, too, rose beyond the upper bound of 6 per cent. However, DK Joshi, chief economist at CRISIL, said it was mostly due to favourable base effect. “Food inflation was near zero last year.”
“It is difficult food inflation. For example, the current rise is largely due to disruption in supply of vegetables,” he said.
About the possible revival in growth, the central bank said there were indications that signaled an upturn in capex cycle, visible in the financial statements of 1,539 listed companies, after the corporate tax cuts were announced.
“Funds mobilised by these corporates during the first half of the current fiscal year were mainly used for fixed assets formation and deleveraging or reduced borrowing,” said Das’ statement. “The preference for fixed assets is noticeable.”
Experts voiced concerns on growth, and broadly highlighted the importance of coordination between fiscal and monetary policy.
“It is time the fiscal policy played the expansionary role, and the monetary policy observed and controlled the subsequent inflationary situation,” former chief statistician Pronab Sen said.
Though conventionally fiscal expansion crowds out private investment, it does not hold when private investment is not happening at all, he said. “Crowding out happens when there is excess investment demand, not in the current situation.”
Sonal Varma, chief economist at Nomura, said green shoots do not appear to be genuine. “We expect growth to disappoint both in FY20 (Nomura estimate of 4.9 per cent) and FY21 (6.1 per cent).”
Varma expects a possible counter-cyclical fiscal policy response from the government in the Union Budget. Enhanced government funding and release of stuck projects can help assuage growth concerns, Sen said.
On inflation, experts were divided on what the “pause” means. “As of now, we do not see a rationale for a rate cut in February policy based on the current thought process of the MPC,” said Suvodeep Rakshit, senior economist at Kotak Securities.
Household expectations of inflation, however, rose to 8.2 per cent for the three-month as well as the one-year-ahead horizon, the central bank’s survey found.