New Delhi: The government and the stock markets should heave a sigh of relief, now that the Reserve Bank of India has thrown its weight behind India’s continued growth story, despite the risks.
Last week, GDP data for the September quarter released by the government showed a slippage after the spectacular show in the June quarter. This prompted many analysts and experts to downgrade the growth prospects for fiscal 2019, implying a continued slowdown the second half of the year. But the RBI, which has not really seen eye to eye with the government on many matters recently, has maintained its earlier prognosis of 7.4% growth of the Indian economy in 2018-19.
It is a relief to see that the government and the RBI agree on something as crucial as growth and inflation projections. “The assessment of the MPC (Monetary Policy Committee) for growth and inflation outlook is consistent with the government’s assessment of inflation and growth,” said Economic Affairs Secretary Subhash Chandra Garg.
As for the minutiae and the pain points between the government and the RBI, these remain albeit on matters slightly different such as the autonomy of the central bank, its reserves and whether some state-owned banks should be taken out of lending restrictions imposed by the RBI earlier this year.
Experts had begun casting doubts over the pace of growth and whether it will sustain, after the Q2 numbers came out. India’s GDP growth fell after four consecutive quarters to 7.1% in July-September from the scorching 8.2% growth seen in the June quarter. This prompted State Bank of India (SBI) to project that GDP growth will slip below 7% in the second half of the current fiscal.
Other experts, including analysts from CARE Ratings and CRISIL, also lowered full year growth forecast by 10 basis points (0.1 percentage point) to 7.4% after the Q2 data was released. Madan Sabnavis, Chief Economist at CARE Ratings, pointed out that “we also have a forecast of 7.4% and hence the RBI unchanged view is not surprising. The main takeaway is that the RBI does not think that the liquidity issue will affect growth in any way.”
On Thursday morning, global ratings agency Fitch also proceeded to lower the growth forecast for India for 2018-19 by a whopping 60 basis points (0.6 percentage points) to 7.2% from 7.8% earlier on worries surrounding the banking sector, higher financing costs and reduced credit availability. So amid all the gloomy growth predictions, RBI sticking to its annual forecast for now should certainly be heartening. Besides, as per Fitch, the 7.2% growth forecast still means India will grow the fastest in the last six years.
The RBI said in its fifth bi-monthly policy statement that although Q2 growth was lower than that projected in its October policy, GDP growth in H1 was broadly along the line in the April policy, when for the year as a whole, GDP growth had been projected at 7.4%.
“Going forward, lower rabi sowing may adversely affect agriculture and hence rural demand. Financial market volatility, slowing global demand and rising trade tensions pose negative risk to exports. However, on the positive side, the decline in crude oil prices is expected to boost India’s growth prospects by improving corporate earnings and raising private consumption through higher disposable incomes. Increased capacity utilisation in the manufacturing sector also portends well for new capacity additions. There has been significant acceleration in investment activity and high frequency indicators suggest that it is likely to be sustained. Credit offtake from the banking sector has continued to strengthen even as global financial conditions have tightened. FDI flows could also increase with the improving prospects of the external sector. The demand outlook as reported by firms polled in the Reserve Bank’s IOS has improved in Q4,” the central bank said.
It went on to say that based on an overall assessment, it was projecting GDP growth in the second half of the fiscal year at 7.2-7.3%, as it had said in its October policy, and 7.4% for the full year.
But despite the bonhomie with the RBI on growth forecast, the government may remain watchful of the risks. Many global indicators continue to be volatile, further currency fluctuation cannot be ruled out, global crude prices continue on unpredictable trajectory (they crashed by more than 20 dollars within weeks) and domestic consumption remains subdued. All or some of these factors could hurt the growth momentum. So it is entirely possible that in the upcoming interim Budget, the government offers sops to push up growth.
(Author is a serious journalist. Views are personal)