GDP to shrink 9.5%, ‘risks tilted to downside’

The Monetary Policy Committee of the RBI on Friday shed its reticence over making a precise estimate of the country’s real GDP for FY21 by predicting a 9.5% contraction in the pandemic-ravaged year, with “risks tilted to the downside”. Among prominent global agencies, only S&P (-9%) has forecast a narrower contraction for the Indian economy.

The central bank, however, has less certitude to offer on its retail inflation estimate for now. The headline inflation had remained above the MPC’s tolerance band of 4 (+/-2)% for eight out of the past nine months, but eased marginally to 6.69% y-o-y in August, against 6.73% in July. The MPC would just say the inflation “will remain elevated in the September print, but ease gradually towards the target over Q3 and Q4”. Of course, the committee chose “to “look through the current inflation hump as transient and address the more urgent need to revive growth”.

Short of cutting the interest rates, the RBI unveiled a clutch of steps to spur growth, including boosting of liquidity support for financial markets and measures to speed up credit flows to specific sectors like SMEs and high net worth consumers and revive exports.

A modest recovery in various high-frequency indicators in September (see graph) could strengthen further in H2, with progressive unlocking of economic activities, governor Shakthikanta Das said, adding, a predominantly “three-speed recovery” might be in the horizon, with individual sectors showing varying paces.

Among the resilient brisk movers are agriculture and allied sectors, FMCG, passenger vehicles, tractors, two-wheelers, drugs and pharmaceuticals and electricity generation.

According to the MPC, manufacturing firms’ capacity utilisation might recover in Q3 and activities could gain some traction from Q3 onwards. However, both private investment and exports will likely be subdued, especially since external demand is anaemic.

“Our analysis suggests that supply disruptions and associated margins/mark-ups are the major factors driving up inflation. As supply chains are restored, these wedges should dissipate,” the MPC wrote.