RBI's FY24 growth forecast seems to be backward-looking, says MPC's Ashima Goyal

Goyal is one of the three external members on the Monetary Policy Committee.

The Reserve Bank of India's (RBI) GDP growth forecast for 2023-24 seems to be "backward-looking", according to Ashima Goyal, one of the three external members of the Monetary Policy Committee (MPC).

"It seems to be backward-looking, assuming past trends in consumption and investment will continue," Goyal told Moneycontrol in an interview following the release of the minutes of the February 6-8 meeting of the MPC on February 22.

"Past trends benefitted from countercyclical policy support, which is ebbing, although exports are slowing. Pent-up demand cannot sustain without income growth," Goyal added.

As per the Indian central bank's forecast from earlier this month, India's GDP is seen growing by 6.4 percent in the next financial year, down 60 basis points from the statistics ministry's first advance estimate of 7 percent for 2022-23.

One basis point is one-hundredth of a percentage point.

While the RBI's growth forecast is broadly in line with the 6.5 percent projection made by the 2022-23 Economic Survey, most economists from outside the government see growth falling closer to 5 percent next year. And Goyal thinks growth could take a "severe hit" if the real repo rate rises substantially above 1 percent on account of continued increases in the nominal rate.

Adjusting the repo rate of 6.5 percent by the four-quarter-ahead inflation forecast, the real repo rate is currently at 0.9 percent – just 10 basis points below Goyal's 1 percent figure.

"Exports are slowing with the global slowdown, aggregate government expenditure is slowing with fiscal consolidation. Growth depends on private consumption and investment, which are the interest elastic components of aggregate demand," Goyal noted.

No forward guidance

Goyal's concerns about growth led her to vote against the resolution to increase the repo rate by 25 basis points to 6.5 percent earlier this month. The rate hike, however, was approved as Goyal and fellow external member Jayanth Varma were out-voted by 4 votes to 2.

When asked if she, along with Varma, were fighting a losing battle, Goyal said the decision was "not about individuals, but about the economy".

"It is important to put all relevant arguments in the public domain for debate, discussion and policy consideration. Let us see if real policy rates rise substantially above 1 percent in this cycle," she said.

Along with the interest rate decision, Goyal also voted against the MPC's resolution to remain focused on the withdrawal of accommodation, with the Emeritus Professor at Mumbai-based Indira Gandhi Institute of Development Research in favour of a shift to a neutral stance.

Goyal told Moneycontrol that rate hikes are possible even if the stance is neutral.

"Markets need to realise there is no forward guidance given current uncertainties. Future action will be data-dependent. It would be best to take positions based on incoming data."

New inflation data shock

Data released days after the MPC's February 8 decision to increase the repo rate for the sixth time in 10 months showed Consumer Price Index (CPI) inflation rose far more than expected to 6.52 percent in January.

The inflation number also caused some confusion among economists, who pointed out that there seemed to be a discrepancy in the cereals index of the CPI, which was perhaps pushing up the headline inflation rate by as much as 35 basis points.

According to Goyal, some problems in the measurement of inflation in January may have been caused by the provision of free food grain under the Public Distribution System, as reported by Moneycontrol on February 15.

But, more importantly, the CPI itself needs an overhaul given that it uses consumption weights of 2011-12, with the 'food and beverages' group accounting for 45.86 percent of the overall CPI basket.

"The share of food and cereals is much lower now. The index needs to be updated as quickly as possible," Goyal said.

"The MPC has to spend far too much time and effort on prices of various food items that are beyond its influence. I had raised this issue when I joined the MPC and in one of my first MPC minutes but the status quo prevails," she added.

As for the RBI seeing inflation averaging 5.3 percent in 2023-24, Goyal thinks the crude oil price assumption of $95 per barrel underpinning the forecast is "precautionary".

"Since lower oil prices have already persisted for some time we should soon see some pass-through of this to retail prices," Goyal said.

Capex rise creditable

The Union Budget's record Rs 10-lakh-crore capital expenditure target for 2023-24 has attracted both plaudits and sceptics, with those of the latter persuasion suggesting that overall spending on investments is lower than pre-pandemic levels once adjusted for, among others, interest-free loans to states and what Central Public Sector Enterprises would have spent had their borrowings not been brought on the Centre's books.

Goyal does not agree with this assessment.

"The current rise (in capex) affects growth today, not the comparison to a four-year-old figure," she said, adding that the aggressive improvement in the composition of government expenditure by raising the share of capex is creditable, given the circumstances.

However, public capex cannot lift the economy all by itself.

"Real interest rates have to remain low and other enabling conditions have to be created by continuing structural reforms that reduce the costs of doing business," Goyal argued.

With the government's tax revenues continuing to be buoyant, Goyal said in the minutes of the February 6-8 meeting of the MPC that it may be time for the government to announce further cuts in the excise duty on fuel products as multiple supply shocks had imparted persistence to inflation.

When asked how much of an excise duty cut could the government afford at the current juncture, Goyal said half of cut announced in May 2022 – Rs 8 per litre for petrol and Rs 6 per litre for diesel – along with some pass-through of softer oil import prices would be adequate.

"The boost to activity would again make up for revenue loss. States should participate and cut VAT. Those that have not cut fuel taxes at all should do so in order to build trust," she added.