Economists pitch for aggressive rate cuts to revive growth

Economists pitched for the need to aggressively cut rates in order to boost a slowing economy.

"We need big time rate cuts. I would vote for a 75 basis point rate cut," said economist Surjit Bhalla said at an event organized by industry body ASSOCHAM on monetary policy.

Bhalla also said that it's a reality that the Indian economy has slowed down. "Currently growing at 5.5 percent, but need more fiscal expansion," Bhalla said.

He also said that since inflation is down, the Reserve Bank of India (RBI) and the government should use this opportunity.

"No real economy can grow at 3.5 percent interest rate. A cumulative 200 basis point cut is required for 6.5 to 7 growth," Bhalla said.

Former chief economic adviser Arvind Virmani said that for ensuring a smooth transition of repo rate, it's important to study how the monetary base grows.

“There is a 55 percent probability of 50 bps rate cut by RBI. If rate cut is less than 50 bps, then stance should be accommodative,” Virmani said.

He also said that repo reduction and monetary accommodation have to go together. However, the concern now is the automobile sector.

The Indian automobile industry, which is experiencing one of its worst slumps, saw domestic sales drop by 12 percent year on year in June 2019, while passenger vehicle (PV) sales declined 18 percent.

“The budget was an investment driven one. There is a need to boost consumption for investment to come back,” Upasana Bharadwaj, senior economist, Kotak Mahindra Bank, said.

Despite the government's stated commitment to make it a USD 5-trillion economy in five years from now, there is every indication that India has an uphill battle at hand.

Exports have declined by almost 10 per cent in the span of a year. Sluggish global demand and the US-China trade war are adding fuel to an already raging fire.

The International Monetary Fund (IMF) has already pared India's growth projections citing lowered domestic demand.

The eight infrastructure sectors averaged 3.6 percent  growth in the April-June period, while exports contracted 1.7 percent during the same period.

India’s gross domestic product (GDP) growth in the March quarter slowed more than expected to 5.8 percent from 6.6 percent in the December quarter. This was the slowest quarterly GDP growth in five years. Annual GDP growth slowed to 6.8 percent in the year ended 31 March from 7.2 percent in the previous year.

Since last month, the Reserve Bank of India (RBI), the Economic Survey of the finance ministry, and the Asian Development Bank have cut their growth outlook for India to 7 percent.