RBI cuts GDP outlook, expects govt to take fiscal prudence path

Looking at the current subdued investment and consumption, and with little expectation of fiscal stimulus, the Reserve Bank of India (RBI) trimmed its gross domestic product (GDP) growth outlook for the current fiscal to 7% from the earlier 7.2% in its bi-monthly monetary policy review on Thursday.

It has raised its Consumer Price Index (CPI) inflation guidance for the first half (H1) of FY20 to 3-3.1% from 2.9-3% and cut it to 3.4-3.7% from 3.5-3.8% for the second half (H2).

Shaktikanta Das, governor, RBI, said with buffer food stocks of 3.4 times of the requirement, the risk of food inflation was less lethal. Additionally, the slowing global demand had stunted the threat from rising global crude prices due to supply issues to inflation.

As per the RBI, the foodgrain stocks, as on May 16, were at 72.6 million tonne, which was 3.4 times the prescribed buffer norms.

The central bank's downward revision of national income forecast is mainly driven by a lower private final consumption expenditure (PFCE) and softer exports numbers, which pulled down the fourth quarter (Q4) GDP of the last fiscal to below 6% at 5.8%.

The same quarter had also seen Gross fixed capital formation (GFCF) growth slip to low single digit at 3.6% after being in the double-digit growth zone for the past five quarters.

On the supply side, the central bank was guided by a deceleration in agriculture and allied activities in the last quarter.

Owing to the emerging economic scenario, several global and domestic credit rating firms and brokerages have slashed their predictions for the country's GDP growth.

For instance, in its review in April, ratings firm Fitch cut its growth forecast to 6.8% from the earlier 7%. It had previously given an outlook of 7.5%.

Fitch cited slow momentum in manufacturing and agriculture for revising its GDP guidance for the second time in the current fiscal.

Deutsche Bank, Nomura, HSBC and Goldman Sachs have also lowered their economic growth forecast after the government announced lower than expected GDP number for the Q4 last week.

Madan Sabnavis, chief economist, CARE Ratings Ltd, believes the GDP revision could be based on RBI's "underlying assumption" that the government is not likely to "stray" from the Fiscal Responsibility and Budget Management (FRBM) path or provide any major fiscal stimulus to push consumption.

"The RBI has taken the (GDP) view on the fourth quarter, where nothing much happened both in terms of investments and any specific action by the government. The second underlying assumption is that the government's fiscal deficit is not going to stray from the FRBM path. There is not going to be any kind of major stimulus coming from the government and that is the reason why they (RBI) have scaled down their GDP projection from 7.2% to 7%," he said.

Sabnavis said the central bank must have taken into consideration the government's past behaviour, when, in FY18, they had resorted window dressing to reach the fiscal deficit of 3.4% of the GDP.

"In FY18 also the government had done quite a bit of window dressing to make sure they could reach the fiscal deficit of 3.4% of GDP because revenues had not increased and they had also rolled over quite a bit of food subsidy," he said.

CARE Rating economist does see any scope for fiscal stimulus in the coming Budget if the government were to stay on the fiscal prudence path.

According to him, a few basis points slippage in fiscal deficit may not prop the GDP number significantly; "the 3.4% of the GDP fiscal deficit does not offer much opportunity or scope for a major fiscal stimulus. If 3.4% jumps to 4%, I would call it a stimulus. You need to have a stimulus of at least 0.5% of the GDP to significantly impact the overall growth in GDP growth but if it is hovering around 3.4% or 3.5% or 3.6% of the GDP then that will not be a stimulus to affect the GDP growth".

D K Srivastava, chief policy advisor, EY India, said the Q4 GDP number had signalled the lowering of growth forecast by RBI.

He expects the national income growth to be in the range of 6.5-7% and feels the government could supplement the monetary stimulus with the fiscal stimulus to boost growth.

"Something like 6.5-7% growth would appear to be realistic. I think the government may come out with a fiscal stimulus plan to supplement the monetary stimulus, in which case inflation can be kept under control and growth may pick up. It may actually be 7% or may go even beyond that," said Srivastava.

The EY economist said it was difficult to take a call on inflation, which would hinge on global crude prices.

"With global economy actually slowing down, petroleum prices may not be under pressure even though there is a supply-side risk," he said.

He also does not see food inflation, which has lately been inching up, to pose as a major concern with more than adequate buffer stock.

However, Srivastava said the government would have to come out with a policy for calibrated release of the buffer stocks to avoid a crash in food prices, which could impact the farmers adversely.

Sabnavis said when the RBI talks about buffer stocks, it speaks only of foodgrains and not for buffer stocks of other crops

"When you talk of other crops, there is a possibility of the risk factor which can upset the CPI numbers in case there is a crop failure on account of a deficient monsoon. Normally, it happens for pulses and it could happen for oilseeds or cotton too. It is possible that these three crops could be affected by less than normal rains. You cannot rule it out but as of today there is no such indication that monsoon is going to be bad," he said.

CARE Ratings has maintained its GDP forecast of 7.2%.

"It's too early in the year and therefore we have maintained our GDP projection. We think the government may probably be doing something in terms of a tax cut in particular and we are also working on the fact that Kisan cash transfer of Rs85,000 crore will add some kind of positive to consumption," he said.