The disappointment of this year has been the macro economy. The Reserve Bank of India's gross domestic product (GDP) growth forecast for FY20 started at 7.4 percent in December 2018 and has been brought down at every single monetary policy committee (MPC) meeting since then and now stands at 5 percent. And it wasn’t RBI's forecast alone that went wrong, every economist on the street was caught by surprise by the suddenness and steepness of the downward spiral of the country's economic growth.
To make matters worse, in the last quarter of the year, inflation has picked up and while it started with inflating onion prices, it has now broadened to a rise in milk prices as well as the prices of medicines and telecom tariffs.
Consumer price index (CPI) is heading towards 5 percent even as GDP is heading to 5 percent. To complete the perfect storm, fiscal deficit looks headed to well over 3.5 percent even if one doesn’t count the rising public sector borrowings. The only silver lining is the current account deficit (CAD), in fact, it is almost at a surplus in December.
Pronab Sen, former chief statistician, Soumya Kanti Ghosh, group chief economic advisor at SBI and A Prasanna, chief economist at ICICI Securities Primary Dealership, shared their views on the economic outlook in 2020.
Sen said that FY21 could look better but a lot depends on what policy action the government takes.
“If you are looking at the current set of policies and the budget remains more or less business as usual, I wouldn’t hold too much hope for FY21 either,” he added.
On risk perception, Sen said: “One of the factors that goes into a downturn is that a downturn always leads to raise risk perception of the lenders and that is happening now. This is going to play out until things start stabilizing and you see an uptick in the capacity utilization. Remember, we are now at the lowest capacity utilization we have ever been and it is going to take at least 400-500 basis points of increase in the capacity utilization before the banking sector feels a lot more confident.”
Asked about forecast for FY21, Ghosh said: “I hope that we have bottomed out but to me the next two quarters are not going to be that good because the euphoria we witnessed in October in terms of rising have somehow dissipated in November and the broad basket of leading indicators, actually deteriorated in November.
“Therefore, the GDP numbers at 4.5 percent, it could be a very marginal uptick from there or even possibly it could be at the same level or decline. I don’t see, to conclusively say that growth has bottomed out as of now because there is still evidence that there has been a deceleration in the economy and the last 1-2 months disruption may not have held the cause. We are at 6.2 percent in FY21 but we are not sure whether that comes with a downside at this point of time,” added Ghosh.
On monetary policy, Prasanna said: “Monetary policy will work but the impact is going to be limited. We have to accept that banking system has become risk averse the non-banking PEs definitely is completely broken. I do not think that is going to change quickly. Therefore, I would think that the emphasis on monetary policy is slightly misplaced if you believe that that’s the only tool available to revive growth.”