Rajan vs Rajan
The Reserve Bank of India, in its latest policy review, refrained from making any projection for the economic growth for the current fiscal year. It however admitted that the economy may see some contraction in the current fiscal year FY21. Post announcement of economic performance data for 1QFY21 a number of agencies and brokerage firms have reduced the full year FY21e GDP contraction number to ranging from -5% to -11%. Similarly, the fiscal deficit number for FY21 now range from 6.5% to 8.5%.
Recently, the former governor of RBI, Dr. C. Rangrajan surprised the markets by stating that FY21 GDP may actually post a small growth instead of contraction. This was a clear departure from his views expressed a couple of months back.
A paper titled ‘India’s Growth Prospects and Policy Options: Emerging from the Pandemic’s Shadow’, jointly written by Rangarajan and India EY India chief policy advisor D K Srivastava noted that notwithstanding the forecasts of GDP contraction made by many national and international agencies, there are reasons to believe that the outcome may be better than these strong contractionary prospects. “We may note that some key sectors like agriculture and related sectors, public administration, defence services and other services may perform normally or better than normal given the demand for health services,” the paper said.
The view is based on the estimates that about 50% of the economy, comprising of agriculture and public administration, defence and other services has been fully operational even in the first quarter when total lockdown was in force. The paper emphasizes that measures like lower corporate tax rate, and incentives for local production may facilitate the relocation of various production platforms to India adding impetus to the normal economic activity.
This view however is not supported by many. Most analysts and economists continue to beleive that recurring local interupttions have not allowed the supply chains to start functioning normally. The mobility restrictions are still inhibiting. As per Nomura India Business Resumption index (NIBRI), the economic activity in India has reached ~77% of February 2020 level. The growth in 2QFy21 will therefore likley be still negative.
At the same time, another former RBI governor, Dr Raghuram Rajan, termed the situation of India economy as “alarming”. In a post he noted that the conditions in India are worsening and the government has gfone into a shell after an initial burst. He said, he current crisis requires a more thoughtful and active government, he said, adding “unfortunately, after an initial burst of activity, it seems to have retreated into a shell.” Dr Rajan exhorted the Indian bureaucracy, by saying ” be frightened out of their complacency and into meaningful activity. If there is a silver lining in the awful GDP numbers, hopefully it is that.” Dr Rajan further noted that “Without relief, houshold skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself”.
Assuming a moderate 5% yoy contraction in 2QFY21, it would take more than ~15% yoy growth in 2HFY21 to record a marginal rise in FY21 GDP. There is nothing on the ground to suggest that it is achievable. It is pertinent to note that in past 12 year, we have not recorded double digit yoy growth in any of the quarter.
Under these circumstances, I find the the estimates of the rating agency CARE more credible. The agencyy said in a recent report as follows-
“GDP growth although expected to improve in the remaining 3 quarters of 2020-21 with the graded unlocking and reopening of the economy would nevertheless be pressured given that there is no respite from the spread of the pandemic in the country well into the second quarter of the fiscal.
Consumption demand and investments which is necessary to propel the economy would continue to be tepid and is unlikely to seen a noteworthy improvement during the course of the year. Government spending would have to do the heavy lifting.
Although the higher growth in the agriculture sector and consequently rural demand would support the domestic economy it would however not be sufficient to compensate for the decline in urban demand and growth. We project the country’s GDP to contract by around 6.4-6.5% in FY21.”
Many readers have asked why would Dr. C. Rangrajan, who has held prominent positions under various governments, such as Chairman of PM Economic Advisory Council (2009-2014); Member of Rajya Sabha (2008-09), Chairman of 12th FInance Commission (2003-04); Governor of Andhra Pradesh (1997-2003)etc., would make such contrarian and to some extent sensational forecast? Well, I have views on this, but would refrain myself from sharing my views on this.