Macro indicators paint a gloomy picture for economy | Analysis

In its August 2019 meeting, the Monetary Policy Committee projected GDP growth for the current fiscal year at 6.9%. This has been brought down to 6.1% in yesterday’s meeting.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announced a 25 basis point cut in policy rates on Friday. However, what has made more news than the rate cut is a sharp downward revision in growth forecast for the Indian economy. In its August 2019 meeting, the MPC projected GDP growth for the current fiscal year at 6.9%. This has been brought down to 6.1% in yesterday’s meeting. This is the sharpest reduction in projected GDP growth rates by the MPC since its inception in October 2016.

Even this gloomy forecast is based on an implicit optimism. The MPC has predicted that GDP growth in the second quarter of the current fiscal year will be 5.3%, and it will climb up to 6.6% to 7.2% in the second half of the fiscal year. GDP growth in the June quarter was 5%. This means the MPC expects the December and March quarters to be better in terms of growth. Such a strong recovery intra-year economic activity is not very common, unless aided by external stimuli.

Hopes of such a recovery are intriguing as the RBI’s Monetary Policy Report released on Friday is unequivocal in recognising a crisis of aggregate demand in the economy. It points towards a slowdown in private consumption and in flow of funds to the commercial sector and economic headwinds from global uncertainties. This is captured in statistics from RBI’s Consumer Confidence Surveys (CCS) and outstanding credit for industry.

Net share of respondents who see their non-essential spending increasing in the current period has turned negative for the first time. The current net perception on employment is also the worst ever, with 52.5% of the people reporting a decline in employment. The CCS is conducted in 13 major cities and therefore only captures urban sentiment.

Another statistic which paints an alarming picture is a sharp fall in credit growth to industry. Growth in outstanding credit to industry in August 2019 was 3.9%, after growing at more than 6% for the past five months. What is even more worrying is that credit growth for micro and small and medium industries turned negative in August. Given their labour intensity, a crisis in small and medium industries will have a disproportionate impact on mass demand.

When seen in the background of grim high frequency indicators such as credit growth, consumer sentiment and car sales, RBI’s hopes of a rapid economic recovery beginning from the September quarter do not evoke a lot of confidence. What is even more perplexing is the muted policy response of just a 25 basis point reduction in policy rates when the MPC itself has called for “intensified efforts to restore the growth momentum”. This raises the question whether the RBI expects the government to give yet another fiscal boost to restore growth.

HT had reported on 1 October, 2019 that the government was considering a reduction in income tax rates to give a boost to consumption. With the government admitting revenue forgone of ~1.45 lakh crore from Corporate Tax reductions, Goods and Services Tax (GST) collections falling to an 18 month low in September, an income tax cut is bound to further affect the fiscal consolidation process.

The Indian economy adopted an inflation targeting framework in 2016, where interest rates were expected to balance growth and inflation. The current situation suggests that it has perhaps gone back to a phase where the policy trade off used to be between fiscal deficit and growth.