This year in particular is very crucial to keep government expenditure and government capex led growth on, said Rajni Thakur, Chief Economist, RBL Bank.
“Consistent fiscal stimulus is important for a positive growth outcome this year in the Indian economy,” she said.
Further, during a time when inflation levels are hitting all time highs, she sees them peaking by September and gradually getting back to 5% handle in the second half of the year.
Here are the edited excerpts of the interview, explaining the current state of the economy.
What do you make of the macros, on balance what do they look like to you?
So we have a shock, which is bigger than the global financial crisis, in terms of overall hit to the global economy. What we are facing is not out of proportion with the rest of the world and we are not immune to the rest of the world.
Also, what we see is policy support coming out much quicker than anytime in recent history, both monetary policy support and fiscal policy support in India and across the globe.
We have spent most of the monetary firepower available, fiscal space is constrained, the demand levels and the economic activity is yet to catch up the pre-COVID trend in most of the sectors.
So the next couple of quarters at least is going to be tough, the question at this point of time is how many of these central banks or policymakers can manage a soft landing.
In the RBI projection, apart from the first quarter, you are looking at anything between 4% to 6% growth in the remaining three quarters of the year.
What will matter at this point of time is how quickly do we move from this 4% projection to a 6.5%-7 %, which will be a neutral level for the economy. And while we are doing that, a fallout is in terms of inflation levels as a risk that we see.
So how much further will the RBI have to act in taming inflation? Significant fiscal measures were also taken recently. So, will the RBI continue to need fiscal support in the coming months?
Across the globe, we have seen inflation levels hitting all time highs. Global inflation is at the tune of 8% from a trend level of 2%. When we are having that kind of a global inflation level, there is no way of determining what the inflation outcome will be in India as well, where imported inflation is a large cut.
So if you are a central banker or an analyst, tracking the economy, you would kind of start monitoring the global factors that are driving these inflation pressures, but also know that there is no real control over some of these monetary factors. For example, we don’t know how crude will finally end up.
Similarly on the supply side, base case expectation is that supply chains gradually start healing from here and we see easing up of logistics pain that we are seeing in the economy. The third one that is kind of driving all of this is in terms of commodity prices, where we’ve already seen some cooling off.
So for RBI to figure out how much of a fiscal support they need will be contingent on how these external drivers move.
The base case, which is currently based on the momentum side, is in terms of inflation levels peaking by September and gradually getting back to 5% handle in the second half of the year.
Will RBI need more fiscal support? That is contingent on both global food prices and global crude prices, both of which RBI has no control over.
And it could play either way. We could probably have a quick solution to the war situation and oil prices coming back to its fundamentals which is basically an 80-90 angle or a prolonged war situation which could put crude to 120-130 as well, in which case it would need more fiscal support.
How do you see demand in the coming months given today’s uncertain times- inflation, rising commodity prices and monetary tightening?
Demand story has a couple of factors working concurrently. One, private consumption demand has not yet caught up with the pre COVID level, even before the war or the China factors started coming into play. And that’s largely coming from the COVID era hit or scar on income levels, and informal sectors among others.
Then there is a new shock in terms of disposable income because price levels are rising and there is a hit in the sentiments as well because there is increased uncertainty on the prospects for the next year.
So to that extent, it is difficult to quantify how much it will impact going forward because it is difficult to quantify how long these shocks are going to stay. But private consumption is expected to stay behind than what the expected pickup in government consumption and investments.
So the key drivers for growth this year will not be private consumption rather the government consumption and investment level.
Let’s talk about the global growth outlook. Amid rising inflation across economies, slowdown of China supply chain disruptions, and other impacts of the ongoing war; do you think we’re heading towards a global recession or will we see it in some specific economies?
What we are headed towards is a slowdown across many economies which is natural considering we had two years of stimulated growth prospects.
Take the US, it is running well above 6% whereas the trend growth is 1.8%. So on a point to point basis you might see the US hitting a negative growth quarter but on an annual average analysed trend basis the US is not heading towards recession.
When they say recessionary fears, what they basically are looking at is that inflation levels rise to an extent that it starts eating onto the growth momentum, and that we already see happening in some of the global economies, largely in the US.
So each of them are in different phases. The Eurozone for example, is running quite strong despite the fact that it’s one of the worst hit economies by the war, mainly in terms of energy prices. The UK had had a good phase of strong growth post covid, now it’s getting back to normal or I’d rather say that the UK is one where there are some recessionary fears building.
In India, recession is not the term to use, the term would be growth slow down. That is something we’re headed to, yes.
Do you think that India’s economic recovery will continue to stay resilient? And what is your growth outlook for India?
Will it remain resilient, that’s largely a factor for the current fiscal year of how much of government led expenditure manages to keep pace with the monetary contraction. So we’re definitely in a phase where RBI will have to raise rates and contract on the monetary side, but we will need an expansion on the fiscal side to match up with it to make sure that the very fragile momentum doesn’t get disrupted.
If government investment led growth continues then we should be able to sail through this year, which is a normalisation year in many ways.
We are clocking in around 7.3% GDP growth rate for FY23 at this point of time. Obviously there are multiple risks on the horizon. These are mostly external, from crude prices to global demand levels, particularly if China slowdown is major, Fed aggressive rate hikes which could impact the capital inflows in the economy and inflation hitting the disposable income levels.