Pedestrians wait to cross a road as traffic passes by in Nashik, India. (Photographer: Dhiraj Singh/Bloomberg)

India’s Economy May Grow Slower Than RBI Estimates: Nomura

India’s economic growth in the new financial year may end up being weaker than the 7.2 percent projected by the Reserve Bank of India, as a drag from the global economy hurts domestic exports.

Sonal Varma, chief India economist at Nomura, believes that discretionary consumption in the economy has been weak. While the lag effect of an easing of monetary and financial conditions will aid consumption in FY20, lower export growth may act as a fresh source of concern, Varma explained.

“The aggregate growth impulses from the monetary easing are not sufficient to offset the negatives that we are seeing from the global drag,” Varma told BloombergQuint in an interaction, a day after RBI announced its monetary policy. Any support from fiscal policy is also unlikely given the government’s strained finances, she added.

Nomura expects GDP growth in FY20 at 6.8 percent, lower than the current year’s estimated growth of 7 percent.

In response to growth concerns, India’s monetary policy committee on Thursday slashed its benchmark interest rate by another 25 basis points for a second consecutive meet. The committee, however, maintained its stance at ‘neutral’, giving itself the room to move in either direction based on incoming data.

Varma noted that while a neutral stance provides more flexibility to the central bank, an accommodative monetary stance would have provided a clear signal that the direction of rates is still going down.

As the RBI, they are cognizant of risks on the upside and downside and a neutral stance gives them more flexibility. But with two rate cuts behind us, an accommodative monetary policy stance would have given a clear signal that the direction of rates is still down. 
Sonal Varma, Chief India Economist, Nomura

The MPC’s decision to keep its stance unchanged may be driven by the many factors that continue to cloud the inflation outlook. A reversal in unusually low food inflation could add to already elevated core inflation and push up price pressures in the economy.

However, so far, both economists and the RBI expect inflation to remain in check in FY20. With inflation seen at near or below 4 percent for most of the new financial year, India has seen two consecutive years of inflation remaining close to the mid-point of the MPC’s target of 4 (+/-2) percent.

It is a big deal. We have achieved that primarily on the back of low food inflation. The question that keeps coming back is whether the low food inflation is structural or cyclical. I think some of the cyclical factors holding down food inflation, whether its low rural wages or excess supply or global food prices, are still very much at play. So it does look like we will have another year or two of 4 percent or below inflation.
Sonal Varma, Chief India Economist, Nomura

A potential change in the medium term outlook for the economy could emerge from promises of minimum income guarantees and farm income transfers.

While the ruling Bharatiya Janata Party has already announced a farm income support scheme, the Congress party has promised a minimum income guarantee scheme, should it come to power.

The key to watch, from an economic standpoint, will be whether these schemes reignite rural reflation, which could trigger higher rural wages. Varma also cautioned that an increased burden of revenue spending could hurt the potential for capital expenditure.

Consumer expenditure, of course, means that we are going to be sacrificing somewhere on the public capex.
Sonal Varma, Chief India Economist, Nomura

Watch the full interview here: