Opinion | Does the RBI think growth is slowing or not?

Manas Chakravarty

The minutes of the RBI’s monetary policy committee meeting show that four of the members — Shaktikanta Das, Pami Dua, Ravindra Dholakia and Michael Patra—believe a growth slowdown is in the offing.

Here’s what they said:

Shaktikanta Das: Growth impulses have weakened and there is a need to spur private investment and strengthen private consumption, especially in the wake of slowing global growth.

Pami Dua: A major downside risk to growth is the continued global growth slowdown, along with trade tensions and associated uncertainties.

Ravindra Dholakia: ….there are concerns about the GDP growth slowing down, which is reflected in the marginal reduction in the RBI’s growth forecast.

Michael Patra: Turning to the outlook for growth, domestic activity remains resilient, but it appears to be shedding some speed in the second half of 2018-19. Dark clouds seem to be gathering over the horizon.

Fair enough. But why then is the RBI projecting GDP growth at 7.4 percent for FY20, while the Central Statistics Office’s first advance estimate of growth for FY 19 is pegged at 7.2 percent? Does that not imply that growth will be higher in FY20 than in FY19?

True, RBI has pruned its forecast for GDP growth in the first half of FY20 from 7.5 percent (with risks somewhat to the downside) to 7.2-7.4 percent, but that is expected to pick up to 7.5 percent in the third quarter of FY20. What’s more, even if we take RBI’s forecast of 7.4 percent growth for FY19 in December, growth in FY20 will be at the same rate.

Pami Dua also says in the RBI minutes, "Consumer Confidence has improved in the December 2018 round, with the future expectations index close to the all-time high of the December 2016 round. Forward looking indicators such as RBI’s Business Expectations Index for the manufacturing sector signal an improvement in the fourth quarter based on upbeat sentiments on production, order books, exports and capacity utilisation.
These movements are corroborated by the January PMI. Meanwhile, growth in the Indian Leading Index, a predictor of the direction of Indian economic growth maintained by the Economic Cycle Research Institute (ECRI), New York, has risen lately, indicating some improvement in economic growth prospects."If in spite of all this there are growth concerns, it is slowing global growth the MPC members are worried about and its negative impact on the Indian economy.

Incidentally, both the IMF and the World Bank have recently lowered their forecasts about global growth, but left Indian growth rate predictions intact. Both these organisations predict growth in the Indian economy will be higher in FY20 than in FY19.

But the RBI has a better picture of the Indian economy than these two institutions and its belief that growth will slow should carry more weight. It is after all quite possible that the crisis in some non-bank finance companies and housing finance companies may have a negative impact.

Nevertheless, if the Reserve Bank thinks growth will slow, should it not lower its forecast for FY20 below the CSO’s 7.2 percent for the current year?