Reserve Bank of India Governor Shaktikanta DasThe Reserve Bank at its monetary policy meeting on Friday cuts its FY22 growth forecast to 9.5 per cent in the backdrop of fresh pandemic disruptions due to virus second wave. This is one percentage point down from its earlier forecast of 10.5 per cent, which the Central Bank projected before the second wave had begun.
The increased spread of infections in rural areas coupled with a dent in the urban demand pose downside risks, said the RBI Governor Shaktikanta Das, in a televised speech, following the monetary policy committee meeting. But how relevant does the forecast of the Central Bank look in the shadow of a third wave or further pandemic disruptions? ETCFO discussed this question with leading economists.
Shubhada M Rao, Founder, QuantEco Research for now “concurs” with the Central Bank’s 9.5 per cent projection.
“If one looks, the RBI has revised down the first half growth prospects lower, while the second-half growth prospects have been revised up. The negative prospects (due to the second wave) will hopefully be contained within the first half,” Rao said, whose own growth forecast is a tad higher at 10 per cent. She expects a staggered opening somewhere mid-June to July, also saying that once vaccination is expedited and reaches a significant ground, the states will then be more confident to unlock completely.
PeriodRBI Growth Projection in % (June 4)RBI Growth Projection in % (April 7)Q118.526.2Q27.98.3Q37.25.4Q46.66.2FY229.510.5
Kunal Kundu, economist, Societe Generale, on the other hand, isn’t very sure and has his fair share of doubts. His projection of GDP growth stands at 8.5 per cent. He indicated that the major growth lever, demand, which constitutes more than 50 per cent of the GDP, is hit hard by the virus. And though the second wave is seen to be subsiding, and the recovery is expected, the pent-up demand, he argued, is unlikely to be sustainable beyond a couple of quarters, and may not steer the direction of the economy.
It is important to note how badly the pandemic has impacted domestic consumption – a development we have been warning against since the first wave and continue to do so.Societe Generale economist Kunal Kundu
The country’s real per capita consumption in FY21 has already contracted by 10.1 per cent as compared to FY20, and which is actually lower by more than 6 per cent from the level it was at, two years earlier, he brought out, further highlighting his demand worries. Also, the states, this time, are not looking keen to open up the economy fast given the experience of the second wave, and hence “road to quicker growth revival” seems improbable, he indicated. Against this backdrop, another major growth lever, government spending, has to do a lot of heavy weight lifting, he emphasised, even to meet his own 8.5 per cent estimate.
A CFO’s view
Kunal Sanghvi, CFO, HDFC Securities shared a perspective on behalf of the overall industry. He thinks the RBI’s downward growth revision to 9.5 per cent in the wake of the second wave, actually, looks realistic now. He is hopeful of a strong recovery, expecting things to bounce back soon. “Last year the moment the lockdown opened there was a spurt in demand across sectors. This time as well the expectations are similar and keeping that in account the growth estimates look realistic,” he signed off.
While the RBI has slashed growth forecast to 9.5 per cent, the Finance Ministry has, for this financial year, stuck to its 11.5 per cent estimate for now, which it had made before the second wave erupted. The country’s Chief Economic Adviser, KV Subramanian, expects a muted impact of the new wave. The Indian economy had contracted 7.3 per cent in the last financial year 2020-21, its deepest plunge in over four decades.