History is replete with instances of disagreements between the government and the Reserve Bank of India (RBI). But they are now on the same page, at least when it comes to growth. On April 6, the RBI revised its GDP growth forecast for 2023-24 upwards by 10 basis points to 6.5 percent, matching the projection made by the 2021-22 Economic Survey.
One basis point is one-hundredth of a percentage point.
To be sure, the hike in the growth forecast was mechanical. The RBI's forecast model is underpinned by certain assumptions, one of which is the price of India's crude oil basket. In February, the RBI's model assumed $95 per barrel as this price, which has now been lowered by roughly 10 percent to $85 per barrel.
And, as per the RBI's Monetary Policy Report, a 10 percent fall in crude oil prices can boost growth by 15 basis points. When one considers that changes to some of the other assumptions were not entirely growth supportive — a weaker rupee and lower rainfall, for instance — a 10-basis-point increase in the growth forecast perhaps makes sense. Then again, it may not.
Aw shucks
"I was a bit surprised when I saw the latest MPC statement from the RBI and the forecast at 6.5 percent," Darren Aw, senior country risk analyst at Fitch Solutions, said on April 12.
"I guess the RBI might be a little bit optimistic at this juncture. I suspect that the most likely scenario is that over the coming months, they are going to start having to reassess the effect that their rate hiking cycle has already been having on the economy," Aw added.
Fitch Solutions sees India's GDP growing by 5.8 percent in 2023-24, which it thinks would be a "very poor performance by Indian standards".
Market pessimism
Aw is far from the only one who thinks the RBI is optimistic. On April 11, the International Monetary Fund (IMF) cut its GDP growth forecast for India for 2023-24 by 20 basis points to 5.9 percent. In fact, as per the central bank's own survey of professional forecasters, the median growth estimate for the current financial year is 6 percent, with economists' estimates ranging from 5.2 percent to 6.8 percent.
Close to the floor of this range is Nomura, whose economists think the RBI's forecast is "too optimistic". According to Nomura, the latest growth upgrade has not accounted for the weakness in global growth that underpins the lower oil price forecasts.
"For example, global GDP growth is assumed to rise 2.9 percent in 2023, unchanged from what was assumed in September 2022, even though the risks are now on the downside," Nomura economists Sonal Varma and Aurodeep Nandi noted on April 6.
While Varma and Nandi admit that data suggest India's growth is stable at the moment, the impact of the sharp monetary policy tightening in developed markets as well as India, along with heightened global uncertainty, is yet to be felt.
"In our view, we are on the cusp of a macro regime change from a stable growth-high inflation equilibrium to a low growth-low inflation one," Varma and Nandi added in their note.
Lest one forgets, even members of the MPC are not convinced by the RBI's growth forecast.
Why so optimistic?
The RBI has pinned its hopes on a good rabi crop strengthening rural demand, buoyant contact-intensive services supporting urban demand, the government's capex focus, above-trend capacity utilisation in the manufacturing sector, double-digit credit growth, and cooling commodity prices.
Downside risks — in the form of further global weakness, protracted geopolitical tensions, tight global financial conditions and market volatility — have not been ignored.
However, the RBI as an institution (as well as its constituents) seems to be rather bullish about the Indian economy. Sample the following from the central bank's latest State of the Economy article, published on March 21: "We remain optimistic about India, whatever the odds."
Admittedly, the article — which counts Deputy Governor Michael Patra among its co-authors — represents the views of the authors and not the RBI. But it is worth pointing out that the authors think India can grow by 7 percent in 2023-24 if certain factors play out favourably.
A different view
Private sector economists, meanwhile, are not sure if things will necessarily go the Indian economy's way.
"The RBI expects a normal monsoon and higher rabi production to brighten prospects for the agriculture sector and rural demand. However, we do not see this materialising," Elara Capital said last week.
Rainfall, in particular, is a matter of concern. While the India Meteorological Department has predicted a normal monsoon at 96 percent of the Long Period Average (LPA), private forecaster Skymet expects it to be 'below normal' at 94 percent of the LPA.
Undoubtedly, the first half of April is too early to make a robust assessment of the impact of a sub-par monsoon. But if that does occur, it would lead to weaker agricultural growth. According to ICRA Chief Economist Aditi Nayar, a below-normal monsoon could lead to a downside of up to 50 basis points to the rating agency's growth forecast of 6 percent for 2023-24.
The RBI's forecasts have usually been conservative, and still can be — at least, with regard to inflation. The optimism on growth, though, is taking a while to digest.
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