The RBI‘s monetary policy review on Wednesday will offer cues on the extent of demonetisation‘s impact on the broader economy; India may well be staring at a GDP growth of less the 6.5 percent in 2016-17, the lowest since 2012-13.
Has the Budget laid the ground for the Reserve Bank of India (RBI) to officially forecast a sub-6.5 percent GDP growth for 2016-17, the lowest in five years?
Finance Minister Arun Jaitley did not say it in his speech, but buried in the Budget documents was the government’s own acknowledgement about demonetisation’s destabilising effect on the economy.
“The growth momentum which had been picking up consistently since the previous year is facing a temporary setback, attributable to a number of macroeconomic factors,” the finance ministry said in the Medium-term Fiscal Policy Statement in the Budget for 2017-18.
In January, the Central Statistics Office (CSO) has projected that, in real terms, India’s GDP—the value of all goods and services produced in the country—will grow at 7.1 percent in 2016-17 from 7.6 percent last year.
Real or inflation-adjusted GDP is usually calculated by subtracting the growth in actual or nominal GDP by the inflation rate or “price deflators.”
This forecast was based on a nominal GDP growth of 11.9 percent.
In the Budget documents, however, the government has assumed a nominal GDP growth rate of 11 percent -- 90 basis points lower than the CSO estimates. Clearly, ceteris paribus or other things remaining equal, an 11 percent nominal GDP growth in 2016-17 could effectively translate into a real GDP growth rate of about 6.2 percent.
Amid signs of slide in consumer goods sales and muted investment activity because of the cash crunch, it is highly likely that the CSO will sharply revise downwards India’s GDP growth in its first provisional figures in May as the advanced estimates were based on incomplete corporate income and factory output data.
Worse, with a mixed demand outlook in the coming months, a flat growth in nominal GDP could also mean that, if inflation starts rising because of hardening oil prices, “real” or “inflation-adjusted” GDP growth rate can fall sharply from the 7 percent-plus trend line.
“The adjustments (nominal GDP forecasts) have been done on account of trends of decline in growth rate, expected to run out in the last two quarters of current financial year, in maximum,” the finance ministry has said.
“Since the CSO figures could not fully factor these on account of limited period data, as they had to advance their projection taking into account the growth figures till October, 2016 the government has moderated the estimated nominal GDP growth rate to factor for the above”.
All eyes will now be on the RBI’s nominal GDP growth rate forecast in the monetary policy review on Wednesday that would offer cues on how fast the central bank expects the economy to revive from the demonetisation-induced deceleration.
It is sometimes useful to look at immediate economic possibilities through two broad prisms — monetary metrics and fiscal policies. The changes in the former, quite often, mirror expected movements in the latter.
The last RBI’s last monetary policy in December came four weeks into the currency culling exercise. Remonetising the banking system, recalibrating ATMs and the making enough notes available quickly for an increasingly restive crowd was the topmost priority.
The next policy comes six weeks after the closure of the 50-day currency exchange window, a week after the 2017-18 Union Budget and in the middle of crucial state assembly polls.
There could likely be a more-than-subtle change in the tenor of the central bank’s commentary about the broader economy’s prospects. Its views about external and internal risk factors may be more hawkish than that of the government.
The RBI may offer good reasons, backed by data emanating from the real sector, to believe that a sustained revival in domestic economic activity may still be some distance away.
RBI Governor Urjit Patel’s third monetary policy may offer pertinent lessons about policy-making in times of induced slowdown. The clawback to 7-7.5 percent growth levels may be a long-drawn one, and Patel’s phraseology on Wednesday may be insightful.