INTERVIEW | See FY22 GDP growth at 10.5%, economic pick-up to continue: Morgan Stanley's Upasana Chachra

In absolute terms, the gross domestic product (GDP) in the current April-June quarter may decline compared to the January-March quarter, said Upasana Chachra, Chief India Economist - Morgan Stanley, in an exclusive interaction with Moneycontrol.

However, Chachra also said that her GDP estimates for the full year were much more optimistic than other agencies, including the Reserve Bank of India. Chachra said that, while some high frequency indicators had seen a slump in the months of April and May as India was hit by a deadly second wave of the COVID-19 pandemic, and many states imposed regional lockdowns, others held up comparatively well.

“I think there is reason to remain optimistic that India will and can post a double digit growth in fiscal year 2021-22,” she said. Edited Excerpts:

Q: I believe your GDP growth estimate for the year is around 10.5 percent GDP growth? What makes you more optimistic than the Reserve Bank of India, which has now cut its forecast to a 9.5 percent GDP growth

A: We were anyway more optimistic than consensus and the central bank, even in 2020, when we were projecting a recovery for this year. Our global team and also our in-house view for India was calling for quick recovery once the COVID-19-related disruptions were behind us.

So, with that in mind, what we've learned from the last wave and what we have seen from the incoming data, I think there is reason to remain optimistic that India will and can post a double digit growth in fiscal year 2021-22. So if you look at the high frequency data for April and May, April data actually held up pretty decently. That was also because not all states were in some form of a lockdown.

The GST collections did not dip below the Rs 1 lakh crore mark even in May. Even if you see ultra-high frequency data like the mobility indicators, they have started turning for the last week of May. As cases have subsided, you're seeing the economy pick-up, and that will continue as states ease the restrictions

Like the RBI, we also think that most of the damage to the economy will be in the June quarter. However, the RBI forecast for June quarter is a tad below what we are projecting, we see a 20 percent year-on-year (YoY) quarterly growth. In terms of forward trajectory, we think that favorable monetary and fiscal policy, ramping up of vaccination programmes and good global growth outlook will continue to help with a cyclical recovery.

Q: What are your expectations from the April-June quarter?

A: So, on a quarter on quarter seasonally adjusted basis, we expect a decline, we expect the decline to be almost about a third of the decline that we saw in the same period in 2020.

Q: What is your sense of monetary policy this year? While retail inflation seems under control, there are concerns regarding wholesale inflation. And plus the growth imperative is always there. So what is your expectation from the monetary policy committee?

A: We expect rates to remain on hold for this calendar year and for an accommodative policy stance to continue. The RBI is definitely going to be supportive of growth in this current environment, where the second wave has created some uncertainty in the growth outlook. Inflation concerns are there, but in the base case, as you would see from RBI estimates, or even our CPI estimate, the number remains within 4-6 percent range.

Our estimate is 4.8 percent average retail inflation. There is some uptick in inflation, in terms of the numbers versus what we've seen in the past, but it still remains within a tolerable band. And therefore it will give the RBI the impetus to keep rates on hold.

Q: There is a concern about a third COVID-19 wave later in 2021. Is that a big downside to your growth projections?

A: In terms of a bear case, the biggest risk comes from COVID-19 itself, given that it has given us nasty surprises, and it is difficult to predict how it pans out. If we were to get some form of third wave or some other form of shock, and I think the whole recovery that we're talking about, which should start in the July quarter, should get pushed back further.

What we have seen from the two waves is that to some extent households and corporates have learned to adapt themselves and to operate in this environment with some form of restrictions. So I think that is what could reduce the damage to economic activity. And that's what we've seen in other countries also, that with subsequent waves, the damage to economic activity is less and less potent. In our bear case, on a calendar year basis, we do see that the numbers versus our projections could be a 100 basis points lower if more disruptions come into the second half of the calendar year.

Q: While the government has taken some measures in the second wave, like extending the free food programme, many stakeholders, including industry bodies, have asked for direct income support for India’s poorest. Is that something the Centre should do?

A: The Union Budget budget has quite categorically highlighted two things. One is that it is okay with a slightly slower path of fiscal consolidation, which indicates that they are fine with keeping expenditure to GDP ratio slightly higher. This is good news and means that fiscal policy remains supportive of growth.

Second is that the nature of the support that the government wants to give is the capital expenditure side. And despite the second wave, the government continued with this focus on public infrastructure projects. So I think that's probably the strategy that the government will continue going ahead. That is to focus on funding in capital expenditure, pushing infrastructure, which in itself can also create the multiplier effect through employment generation. So, I think the government has the right strategy in terms of how it wants to support the economy, and we are also of the view that going for an extended support scheme can be a bit risky in terms of the fiscal situation.