Managing growth expectations

In a highly uncertain global economic environment, realistic growth projections would reduce risks

Chief Economic Advisor V Anantha Nageswaran has done well to note that growth in gross domestic product (GDP) in the current fiscal year is likely to be between 6.5 and 7 per cent. He further added that this would be lower than what the government expected earlier. This is perhaps the first time a high-ranking government official has expressed the possibility of ending the current fiscal year with GDP growth lower than 7 per cent. With the given global and domestic economic conditions, growth is more likely to be closer to the lower end of the range than the upper end. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its September meeting revised its growth forecast lower to 7 per cent as against 7.2 per cent earlier. Most forecasters adjusted their growth projections after the GDP numbers for the first quarter came below expectations. More clarity will emerge after the July-September GDP numbers, due later this month, are out.

There are a variety of factors that could affect growth in the second half of the fiscal year. While the decline in fresh Covid cases and anecdotal evidence of a pick-up in activity in contact-intensive sectors would help, the synchronised tightening of monetary policy across the world will be a drag on growth. It is also worth noting that the GDP numbers in the first half of the year are influenced by a weaker base. The revised projection of the MPC, for instance, expects growth to be at 4.6 per cent in the second half of the year. In terms of risk, aggressive monetary policy tightening by large central banks would affect global growth, leading to exports from India weakening. However, higher energy prices would keep the current account deficit elevated, which would affect growth.

Global growth, according to the International Monetary Fund, is expected to slow to 3.2 per cent in 2022 compared to 6 per cent in 2021. Further, aggressive monetary tightening by the US Federal Reserve has resulted in a significant appreciation of the dollar, leading to increased volatility in global currency markets. The rupee has depreciated by over 10 per cent this year. Since a number of central banks may not be able to match the aggressive hikes by the Fed, currency markets can be expected to remain volatile in the foreseeable future. A sustained tightening of global financial conditions and volatility in currency markets could affect inflation outcomes and lead to a higher than expected policy tightening by the MPC.

Some of these risks to growth and macroeconomic stability are unlikely to abate very quickly. The focus thus needs to be on maintaining macroeconomic stability, as also noted by the chief economic advisor in his remarks. The global economy is expected to slow further in 2023. It is, therefore, important to have more realistic assumptions for growth, which would not force policymakers to take unnecessary risks. India has been running a large general government budget deficit, which needs to be brought down to a more reasonable level as soon as possible. The RBI has missed the inflation target and needs to do more in terms of maintaining price stability. In a highly uncertain global economic environment, high fiscal and current account deficits along with higher inflation could increase macroeconomic vulnerability.