Positive GDP growth seen in Q3, need to fight inflation: RBI

Indian Economy is recovering faster than anticipated and may post positive growth in Q3FY21, according to the Reserve Bank of India (RBI). However, the central bank cautioned in a monthly bulletin that efforts need to be redoubled to fight inflation to ensure that the incipient growth impulses are not hurt.

States, which constitute around 60% of the general government capex with a fiscal multiplier above 2, may resort to a cut in capex in 2020-21, which may act as a drag on revival of investment and overall growth, the RBI warned.

Capital expenditure, which collapsed in H1FY21, will need to be scaled up as a priority to support economic revival, the RBI noted. “… real GDP growth is expected to break out into positive territory in Q3, albeit, to a slender 0.1%,” the RBI said in an article.

“Since the assessment presented in the last month’s article, more evidence has been turned in to show that the Indian economy is pulling out of Covid-19’s deep abyss and is reflating at a pace that beats most predictions. Although headwinds blow, steadfast efforts by all stakeholders could put India on a faster growth trajectory.” At the same time, efforts need to be redoubled to excoriate the ‘worm in the apple’—inflation—before it hurts the impulses of growth that are taking root, it added.

India’s real GDP contracted 7.5% in Q2FY21.In Q3FY21, high-frequency indicators point to a recovery gaining traction, with double-digit growth in passenger vehicles and motorcycle sales, railway freight traffic, and electricity consumption in October, although there was moderation in some of these indicators in November. RBI’s latest forecast has pegged GDP to 7.5% in FY21, an upgrade from 9.5% contraction estimated by it earlier.

While the Centre spent 21.4% of the budgeted capex in Q1FY21, states spent only 7.3%.In Q2FY21, the pace of spending slowed down for the Centre, as it spent 18.8% of annual budgeted capex. Though states improved from Q1, they spent only 12.7% of annualplaninQ2.

“Public investment in healthcare, social housing, education and environmental protection is the need of the hour to build a more resilient and inclusive economy. Governments (Centre and states) will have to effectively balance between continued fiscal support for the fragile recovery process and addressing the medium-term debt-deficit imbalances, while ensuring good housekeeping and adequate transparency in the fiscal reporting,” the RBI said in the second article.