Downward revision of growth projections shows inadequate stimulus: EY

Stating that high-frequency indicators signal slow but steady turnaround, EY said PMI manufacturing and services index, power consumption and forex reserves showed improvement in June.

The sharp downward revision in growth projections by various national and international agencies indicates the impact of the coronavirus-induced lockdown and inadequate stimulus package, EY said on Wednesday adding that June economic indicators show an uptick in activity.

EY's current assessment of India's 2020-21 real gross value added (GVA) growth is 1.9 per cent provided that India sticks to its infrastructure funding plans.

Stating that high-frequency indicators signal slow but steady turnaround, EY said PMI manufacturing and services index, power consumption and forex reserves showed improvement in June. Also, GST collection increased to Rs 90,917 crore in June, from Rs 62,009 crore and Rs 32,294 crore in May and April, respectively.

Speaking at the EY webinar on 'Rejuvenating Growth - Economic and Trade Policy Pathways', EY Indian Chief Policy Advisor D K Srivastava said India's fiscal stimulus at 1.2 per cent of GDP is the third lowest among the major economies of the world, but hoped that as more fiscal space gets created there could be another round of stimulus towards the later part of the financial year.

The growth projections for current year by various global and domestic agencies indicate a sharp contraction ranging from (-)3.2 per cent to (-)6.8 per cent. The more recent the projection, the steeper is the predicted contraction, EY said.

While the World Bank had projected Indian economy to contract 3.2 per cent, the International Monetary Fund (IMF) and Asian Development Bank (ADB) pegged the growth at (-)4.5 per cent and (-)4 per cent, respectively. S&P and Fitch has projected a 5 per cent contraction, while Nomura said growth would be (-)5.2 per cent in 2020-21.

Among the domestic agencies, SBI and CARE Ratings have projected economy to contract by 6.8 per cent and 6.4 per cent, respectively, while India Ratings pegged it at 5.3 per cent.

Indian economic growth stood at an estimated 4.2 per cent in 2019-20.

"The multilateral agencies thought this is going to be very inadequate and the Indian economy will therefore slip into a sharp downturn. But, we have to supplement this that the monetary policy stimulus is much more reasonable," Srivastava said.

EY's current assessment of India's 2020-21 real GVA growth is 1.9 per cent "where we allow for a contraction of (-) 4.4 per cent in manufacturing and a growth of 0.5 per cent in trade, hotels, transport and communication sector. In order to realise this growth, financing of the NIP as per its time schedule must be ensured."

Another round of monetary and fiscal stimuli during the latter part of the financial year may also be considered, EY said.

To augment infrastructure and create jobs in the country, a government task force has projected a total investment of Rs 111 lakh crore in infra projects over five years during the FY 2020-25 period.

In May, the government announced a Rs 21-lakh crore economic stimulus package, which included government measures and RBI liquidity, to deal with the fallout of the Covid-19 pandemic on the economy. Out of the nearly Rs 21-lakh crore package, Rs 8.01 lakh crore is on account of liquidity enhancing measures taken by the RBI since February.

"We are now using both monetary and fiscal weapons of our armour in a much proper combination giving proper emphasis to growth, reemphasising growth a little bit more than inflation right now. And this, we can continue for 2 years at least until we come out of this and until we are able to create additional fiscal space," Srivastava added.

He said the repo rate was brought down from 7.25 per cent to 4 per cent, which is a historically low level of interest rate.

"This, supplemented by a large additional liquidity into the system, would help the Indian economy come out of the economic downturn and this may be further supplemented even in the later part of fiscal year by a fiscal stimulus as more fiscal space gets created," Srivastava added.

Stating that the monetary policy framework was "overdone" for controlling inflation and the weight on growth was underplayed with no specific target laid down.

"Overcontrolled inflation has led to real and nominal growth slip down. That squeezed our fiscal space. We should have conceived the policy instruments on serving two policy objectives -- growth and inflation -- and both should have been considered together," he said.

Srivastava added that "there is a reversal in the way we are now looking at monetary policy and suddenly from a very high interest rate regime, we have now gone down to a low interest rate regime and I would argue that there is scope for another round of some reduction in interest rate in the latter part of fiscal year".

Under the monetary policy framework agreement signed between the government and the RBI in 2015, the central bank sets policy rates in a way so as to keep inflation at 4 per cent (+/-2 per cent) and achieve price stability in the economy.

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