New Delhi: India’s economic growth will be much faster than what has been projected by the Reserve Bank of India in its monetary policy announced on Friday, said a top economist, while endorsing the Bank’s decision to maintain the status quo on benchmark interest rates, saying it was necessary given the inflationary pressures.
In its monetary policy announced on Friday, Reserve Bank governor Shaktikanta Das maintained benchmark interest rate at which the banks lent from the RBI, the repo rate at 4%, while the reverse repo rate, the rate at which banks park their surplus funds with the RBI, has been maintained at 3.35%.
The RBI, however, updated its assessment of the GDP growth rate this year. In today's policy announcement, the Bank projected that the country’s GDP is likely to witness a contraction of 7.5 as against its earlier projection of a 9.5-9.8% contraction for the FY 2020-21.
India suffered the worst impact of Covid-19 induced lockdown measures as the country's GDP growth registered the sharp decline of 23.9% in the first quarter which was the sharpest decline among the major economies of the world. However, it showed a faster than expected recovery in the second quarter as the Government began its unlockdown measures from June onwards. The GDP registered a contraction of 7.5% against the anticipation of it being in the range of 9-10% or even higher.
Reserve Bank governor Shaktikanta Das said, the GDP growth which was in negative in the first two quarters of the fiscal will turn the corner third quarter onwards, clocking a growth of 0.1% in the third quarter and improving slightly to 0.7% growth in the fourth quarter.
Professor Charan Singh, a former senior economist at the independent evaluation office (IEO) of the International Monetary Fund (IMF), says given the corporate results in the second quarter (July-September period), and a sharp increase in the demand during the festive season, the country’s GDP growth during the third and fourth quarters will be faster than the Reserve Bank’s estimates.
“The growth projections given by the RBI are very good but I think the third and fourth quarters (October-March period) will show much higher growth than anticipated by the RBI,” said Professor Charan Singh, CEO of economic policy think tank EGROW Foundation.
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“My expectations of better performance is based on the Q2 results as well as the fact that these are the months of festivals and marriages therefore the economy is expected to rebound and recover faster than that anticipated by the RBI,” Professor Singh told ETV Bharat.
Taking reference from the performance of purchasing managers’ index (both manufacturing and services PMI), and other macro-economic indicators, the Reserve Bank said the GDP growth will be much more broad based and balanced during the first six months of the next financial year.
RBI Governor Shaktidanta Das projected India’s GDP growth rate surpassing the pre-Covid level during the April-September period.
It would be in the range of 6.5 per cent to 21.9 per cent during the H1 (first six months of the next fiscal), said the RBI governor.
High inflation behind status quo
Speaking to ETV Bharat, Professor Charan Singh blamed high inflation behind the Reserve Bank’s decision to maintain the benchmark lending rates – repo and reverse repo rates.
These two rates determine the broad directions for the cost of borrowing by both institutional borrowers like companies and also individual borrowers who borrow home loan, auto loan and personal loans from banks and other lenders.
In its policy, RBI governor said the retail inflation as measured by the Consumer Price Index (CPI) remained at a high level, 7.3% in September and 7.6% in October, well above the monetary policy committee's mandate of keeping it in the range of 4-6%.
“Given the circumstances of the inflationary pressures this is the most appropriate thing to do in the current context. The pause is the most appropriate,” said Professor Charan Singh.
(Article by Krishnanand Tripathi)
