India’s GDP prospects: What you see is not what you get

The first risk facing emerging economies, particularly India, is the prospect of the US Federal Reserve Bank gradually reducing its market purchase of securities issued by the US government and government-owned agencies. While the Fed has not said anything officially, Federal Reserve Bank of St. Louis president James Bullard in July stated that rising employment and inflation data merited a “tapering" of the Fed’s $120-billion-a-month asset-purchase programme. Since then, many other Federal Reserve governors in the US—Robert Kaplan from Dallas, Raphael Bostic from Atlanta, Tom Barkin from Richmond and Mary Daly from San Francisco—have also chimed in, echoing similar concerns. Only Bostic and Barkin have a vote in the 2021 Federal Open Market Committee (which works on a rotational basis), but the growing crescendo of influential voices might finally persuade the Fed to reverse its position. Yet, both RBI and FinMin make only perfunctory remarks about this risk.

Tapering has consequences for the Indian economy, though the impact might be less devastating than 2013. Two outcomes are likely: a slowdown in incremental dollar liquidity creation and rising expectations of higher dollar interest rates. Slower liquidity expansion could impact both the cheap liquidity-fuelled investment boom in startups as well as inflows into secondary capital markets. Expectations of rising dollar interest rates will result in outflows as investors seek higher-yielding dollar assets. This will dampen capital markets, harden bond yields and depreciate the Indian rupee, thereby introducing inflationary impulses to the country’s economy.

Unfortunately, that could exacerbate existing inflationary pressures , with the consumer price index having crossed 6% for two consecutive months before moderating slightly to 5.6% in July. Both FinMin and RBI recognize the inflationary threats to the economy, but more from supply-side ruptures than other sources. This approach allows them to dismiss high price levels as “transitory", thereby disregarding possibility of structural changes in the price indices. There are inherent risks in such a strategy: future remedial measures might be ineffective by the time they are introduced.

Interestingly, there is a subtle divergence between RBI’s assertions and its sub-text. Despite all its outward nonchalance, RBI does recognize the inflation risk: it has revised its inflation guidance for 2021-22 upwards to 5.7%, from 5% in April 2021. This variance between contentions and nuances, where statements are at odds with data and projections, is an ideal breeding ground for contradictions. This is evident in how growth dynamics are presented in the two reports.

The FinMin report, for example, downplays the tail-effect of covid’s second wave or the likely risk to economic revival from a possible third wave. It also discounts the under-reporting of covid-related infections and deaths by certain states, or the uncertainty surrounding India’s pace of vaccination and adequacy of vaccines. This de-emphasizing of risks might have been necessitated by a ‘whatever-it-takes’ focus on reviving economic growth. RBI Governor Shaktikanta Das expressed this succinctly on 6 August: “At this juncture, our overarching priority is that growth impulses are nurtured to ensure a durable recovery along a sustainable growth path with stability."

As things stand, despite the assertions on fostering growth, India’s gross domestic product (GDP) is unlikely to reach 2019-20 levels anytime soon. RBI has projected a 21.4% GDP growth for the April-June 2021 quarter; assuming that comes true, GDP will still be 6% lower than April-June 2019. And while RBI has scaled down its GDP growth projection for 2021-22 as a full year, from 10.5% to 9.5%, it is sufficient to marginally overtake 2019-20’s GDP, assuming 2021-22 can sustain a 9.5% growth. But, RBI introduces another gulf between intent and reality here: uncertain of how the pandemic will affect growth prospects, RBI has actually downgraded its growth projections for the three remaining quarters of 2021-22.

The overt positivism is also at odds with downgrades by most international institutions: the World Bank’s 2021-22 GDP growth rate estimate for India is 8.3% and the Asian Development Bank’s is 7.5%. The International Monetary Fund’s forecast at 9.5% is aligned with RBI’s, but only after it was slashed by three percentage points from 12.5%.

India’s current economic predicament sharpens the oddities: economic stagnation combined with the possibility of rising prices. While other countries have tried to spur growth fiscally through demand regeneration, India has depended on accommodative monetary policy (low interest rates with surging liquidity) and below-the-line fiscal support (such as credit guarantees). Positive messaging as a strategy can only work when it’s accompanied by ground-level action and astute timing. Unfortunately, both seem to be missing this time.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.