Analysts at both Nomura and Bank of America said the finance ministry needs to take strong supportive measures to support demand
According to economists, the current scenario will need an aggressive fiscal response
The Union government and the central bank need to act decisively on a fresh fiscal stimulus and a steep interest rate cut to drive India’s economic growth out of the hole it finds itself in currently, said industry leaders and economists, a day after the economy contracted at the steepest pace in four decades.
Analysts expect the Reserve Bank of India (RBI) to cut policy rates by 50-75 bps this fiscal to put the economy back on the rails. RBI has cut rates by 40 bps since 1 April to 4%.
“We believe the current stagflation scenario is transitory and policy rates will be reduced by an additional 50 basis points cumulatively, starting in December when inflation eases," Nomura Securities said in a report on Tuesday. Bank of America Global Research expects RBI to follow up on measures to soothe bond yields and foster orderly market conditions, with further rate cuts of 75 basis points by March 2021.
Analysts at both Nomura and Bank of America said the finance ministry needs to take strong supportive measures to support demand.
“The next round of policy stimulus is likely to be targeted and could take the form of an expanded scope of cash transfers, public employment programmes in urban areas, along with the continued focus on public investment," said Nomura.
The contraction was led by a steep fall in domestic demand, reflecting the impact of the strict lockdowns. The services sector, construction industry, manufacturing and trade industries were the worst hit.
“The negative GDP can become plus by January, provided the government incentivizes realty and also provides liquidity. We are also hoping for labour to return to work faster. Also, demand for commercial realty will pick up once GDP moves back into the positive territory. If GDP is zero or minus, then commercial demand will be impacted," said Niranjan Hiranandani, managing director of Hiranandani Group.
The CEO of a midsize steel company said the government must focus on boosting demand.
“On the economic side, the government can offer a stimulus that will boost consumer spending because all sectors are facing a problem with demand, even B2B sectors. We have to face the fact that a full economic recovery will take at least a year, if not longer," the executive said on condition of anonymity.
Kapil Kaul, South Asia CEO of CAPA-Centre for Aviation, said for the battered aviation sector, the government can take several measures such as providing relief to airlines on aviation turbine fuel by reducing the value-added tax for next 2-3 years till it is included in GST.
According to economists, the current scenario will need an aggressive fiscal response, and in the absence of a strong policy stimulus and subdued economic activity, there could be knock-on effects on the labour market, small and medium enterprises, and ultimately on the banking system.
To revive demand, the second phase of support from the government should extend beyond the “survival kit" of measures announced so far, said Sonal Varma, an economist at Nomura. “We expect fiscal-monetary policy coordination going ahead, as RBI endeavours to keep long-term government bond yields low, to ensure smooth financing of higher fiscal deficits. Secondary market government bond purchase is likely to be the first line of defence, but we can’ rule out debt monetization".
Kalpana Pathak, Tanya Thomas and Rhik Kundu contributed to the story.
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