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SPOILT FOR CHOICE

Take the Indian budget, add monetary policy to it, and get three GDP estimates

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Indians have enjoyed an ever-expanding array of choices for consumer goods over the past couple of decades. In this season of cheer and goodwill, they now have the pleasure of even selecting a version of India’s growth perspectives, depending on the risks playing out.

Three versions are on offer. Over the past 10 days, the Indian public has been furnished with separate estimates of India’s expected gross domestic product (GDP) for next year, 2022-23.

First, on Jan. 31, the finance ministry presented the government’s economic survey for the current year, 2021-22, which also provided a line of sight to next year’s GDP. The estimate from the office of the chief economic adviser: 8-8.5% real growth, that is growth adjusted for inflation, over 2021-22.

Next day, Feb. 1, came the government’s budget for next year, an annual exercise in estimating how much it will earn through different revenue streams (through taxes or selling off government-owned companies, like Air India) and how much it will spend on salaries or roads and bridges. The government’s budget pencils in the year’s tax collection projections on the basis of a rough estimate of how the economy will grow. Finance minister Nirmala Sitharaman, in an unusual display of conservatism, expects India’s nominal GDP to grow by 11.1% during 2022-23.

Then on Feb. 10, the Reserve Bank of India (RBI) presented its last bi-monthly monetary policy for 2021-22. The central bank has estimated that India’s real GDP will grow by 7.8% during 2022-23, with consumer inflation averaging 4.5%, yielding a nominal GDP growth of 12.3%.

Three different versions of India’s future GDP, all presented within a span of 11 days: 8-8.5%, 6.6%, and 7.8%.

A quick point here. If we juxtapose the survey’s and budget’s GDP estimates, since both the exercises were conducted in the finance ministry, it seems the expected rate of inflation is 3.1%-2.6% for the forthcoming financial year (Sitharaman’s 11.1% minus the survey’s 8-8.5%). But, since RBI has already provided a feel for next year’s consumer inflation, the budget’s projection of real GDP works out to 6.6%.

So, there you have it, three different versions of India’s future GDP, all presented within a span of 11 days: 8-8.5%, 6.6%, and 7.8%. Take your pick, depending on your personal fancy.

But, if you look closely, these numbers are also telling us something.

Circumspection in the air

For one, if we leave aside the Economic Survey forecast, both Sitharaman and RBI governor Shaktikanta Das seem to be erring on the side of caution. Both have dialled down their usual penchant for bold and ambitious growth targets.

Last year, around this time, RBI’s Das was slightly more bullish and had forecast a growth rate of 10.5%. Using his inflation estimates, Sitharaman’s forecast was 9.9%. The first advance estimate shows that the year might end with a 9.2% growth.

So, why have both Sitharaman and Das back-pedalled on growth? Two things stand out.

The first is circumspection. All it takes is a virus to upend the well-laid plans and aspirations of economic planners. The devastating second wave of April-May 2021, made deadlier by sub-optimal vaccination and a severe deficit in healthcare infrastructure, upset all plans and projections by a mile. The delta variant resulted in a large number of deaths and pushed back nascent recovery by a few weeks. And then, just when things seemed to be getting back on an even keel, another variant called omicron threw sand in the wheels of recovery.

Who knows whether another variant will turn spoilsport next year. There is no telling with this shape-shifting virus; it irrupts and disrupts, and could once again end a recovery party even before it begins. The lessons from last year’s stumbles seem to have informed the conservative growth approximations.

Which is why the RBI’s monetary policy committee also probably feels it is too early to start normalising policy. The RBI’s monetary policy has continued with its accommodative stance and eschewed any rate hikes, which is at odds with bond market expectations.

This brings us to the second factor. Even if we are willing to forget the virus for a moment, the RBI’s call has also been informed by the burden of risks weighing down on the horizon. The central bank’s policy statement of Feb. 10 spelt out some of its worries: “The global macroeconomic environment is, however, characterised by a deceleration in global demand in 2022, with increasing headwinds from financial market volatility induced by monetary policy normalisation in the systemic advanced economies and inflationary pressures from persisting supply chain disruptions. Accordingly, the MPC judges that the ongoing domestic recovery is still incomplete and needs continued policy support.”

Das actually provides a more specific matrix by stretching the envelope of risks: “In a global environment rendered highly volatile and uncertain by diverging monetary policy stances, geo-political tensions, elevated crude oil prices and persistent supply bottlenecks, emerging economies are vulnerable to destabilising global spillovers on an ongoing basis. Thus, policymakers face daunting challenges even as recovery from the pandemic remains incomplete.”

Unpeeling his statement, four risks stand out.

Russia, oil, supply chain, inflation

The first is central banks moving in different orbits, what Das calls “diverging monetary policy stances.”

While some central banks are continuing with their accommodative policies, some other central banks have been tightening by reducing liquidity and increasing interest rates. This is a step-change in the global financial system.

Most central banks across the globe, following the 2008 financial crash, had started coordinating their actions and policy frameworks, barring the odd or temporary deviation (such as the US Federal Reserve’s 2013 taper tantrum). The pandemic has rent asunder that global compact; this is a major risk because the global economy is still inter-connected and financial ripples that begin in one corner of the world can turn into tsunamis in another, including in India.

The global economy is still inter-connected and financial ripples that begin in one corner of the world can turn into tsunamis in another, including in India.

The second risk stems from the Russia-Ukraine standoff. Russia’s unrelenting stand of not allowing NATO (North Atlantic Treaty Organisation) forces in its bordering countries or for them to deploy nuclear warheads has clashed with the security anxieties of the US and its European allies.

Consequently, in a situation poised at cliff’s edge, both Russia and Ukraine have been staring down the barrel of a gun. China is the other joker in the pack. Both Russia and China sense a vacuum developing in the global power sweepstakes and both have been flexing their muscles to test the US’ resolve to stick to its principles. India’s ability to balance its geopolitical partners, or its security concerns, with its trade or business imperatives will require delicate footwork.

These face-offs have led to collateral damage, and a third risk: fossil fuel prices have been shooting up and are currently hovering close to $90 a barrel, give or take. As the impasse continues unabated, blowing hot one day and cold the other, crude oil prices seem on way to keep their date with $100 per barrel. As a net importer of crude oil, petro-products accounting for 60-70% of the import bill, fuel price volatility has serious inflationary implications for India.

And so do broken supply chains, which is the fourth risk. The impact for India works on two fronts. Shortage of semiconductor chips is holding back the delivery of a wide variety of products, including passenger cars, thereby driving up prices. Second, the global shortage of containers hampers export efforts, which inhibits growth; the high cost of containers, conversely, pushes up import costs, thereby further fuelling the inflationary impulses.

The bruising experience of the delta variant, with even the relatively harmless omicron displaying its disruptive sinews, might have given both the government and the RBI reason to pause and reflect. India’s output levels are barely above the pre-pandemic level, leave alone the historic levels of the past two decades. Private consumption has been lagging and, given the rising unemployment numbers, it could be a while before it stabilises at earlier levels.

No wonder then that Nirmala Sitharaman has pushed down on the fiscal pedal, but incorporated a structural change in the nature of spending: capital expenditure (like roads and bridges) instead of redistributive policies which supplant lost income and help restore basic consumption.

Capital expenditure is expected to not only generate demand in downstream industries (such as cement and steel) but also get the private sector to start spending on upgrading their factories or expanding their capacities. Even Das and his merry band at the monetary policy committee do not wish to destabilise this slow walk back towards recovery by raising interest rates or squeezing liquidity.

There is only one catch here: This chosen path to recovery is a long and winding road. There is always a chance that some other, unexpected risk will appear mid-way.

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