Mumbai: India’s economic growth is expected to pick up in the coming two quarters with an increase in government spending, even as private investment lags, according to Monetary Policy Committee (MPC) member Nagesh Kumar.
Kumar was one of the two external members of the Reserve Bank of India’s MPC who had voted for a 25-basis-point rate cut to help revive growth, which according to him has seen a serious decline and warrants immediate policy attention. In the MPC minutes released on Friday, Kumar, one of the six members of the rate-setting panel, had noted that growth slowdown largely reflected the weakness of the industrial sector, deteriorating the employment sentiment in Q2.
Explaining this in detail, Kumar told Mint in an emailed interview that the sharp slowdown in the GDP growth to 5.4% in the second quarter ended September was transient. This slowdown prompted most analysts to downgrade the GDP growth forecasts for 2024-25 from around 7% earlier to around 6.5% now.
“We should expect an improvement in growth in the coming two quarters. The government capex, which saw a squeeze in the first quarter, has begun to revive in the second quarter and should gain momentum in the third and fourth quarters," Kumar said. "The government capex should, therefore, help to lift the growth rate in the second half of the year. Yet, monetary easing could support growth further by bringing down the cost of capital for private investments."
On inflation, Kumar argued that interest rates have limited impact on taming food prices, an argument also made in last year’s Economic survey. The survey had also noted that inflation-targeting framework should be changed by excluding food prices as interest rates had failed to curb food inflation, which surged to 10.9% in October.
“I have argued in my statement that while looking at the policy options for reviving growth and containing inflation, one should factor in their determinants. This is because monetary policy instruments such as interest rate changes have more to do with demand management and have limitations in addressing the rising vegetable prices, which are primarily due to a supply-side shock, namely seasonal demand-supply mismanagement, which was beginning to correct itself in November," he said. The inflation-targeting framework of MPC is currently focused on addressing the headline inflation based on Consumer Price Index (CPI), which includes food as well as non-food items.
With the appointment of the new RBI Governor, a deputy governor in place of Michael Patra next month and new external members, the MPC’s next policy meeting in February will be keenly watched. The street is expecting the committee to pivot to rate-cutting cycle to revive growth.
This meeting will be held in the backdrop of an uncertain external environment with US President Donald Trump taking charge.
According to Kumar, the MPC will factor in all these changes before making a decision.
“We are living through highly uncertain times with upcoming changes in the economic and trade policy in the US with the change of administration in January, the ongoing geopolitical conflicts, which have a bearing on the oil prices, exchange rates, etc," Kumar said. “The MPC will factor in the trends of the past months and projections for the future when it meets next to arrive at its decisions."