ashima goyal: Where are we going to see support for GDP this fiscal? Ashima Goyal explains


“RBI projections did not impute any slowdown despite the rate rises. The projection state is almost the same. This suggests that with the rate rise we need to see if there is some effect of that on construction activity,” says Ashima Goyal, Member, RBI Monetary Policy Committee.

Are you disappointed with the first quarter growth numbers?

There are base and momentum effects and the pandemic effect and now the Ukraine war. It is very difficult to infer anything from a 3% difference or especially 13% and 15%. One of the major factors for not having higher numbers was the slowing of export growth because export minus imports has become more deeply negative over this quarter.

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We need to look at the breakup; consumption, is investment holding up at all? Also Q1 was the period when we had Covid Delta last year and so look at the momentum, why sequential contraction is a worry; RBI projections did not impute any slowdown despite the rate rises. The projection state is almost the same. This suggests that with the rate rise we need to see if there is some effect of that on construction activity. We will look at the data more carefully.

Q1 was also marked by a decline in export growth and in the months ahead, exports are not going to do very well. That is very clear both from the recessionary tendencies in the western world as well as the fact that there was a growth slowdown across the board. Last year almost 50% of GDP growth came from exports! Where are we going to see that support for GDP in this fiscal?
The support for growth comes from net exports, that is export minus imports. As a result of the hardening of oil prices, the contribution of net exports went down even though export growth was quite healthy. But overall, we will see some slowdown in export growth. It also depends on oil prices what happens to imports and then even non-oil imports were growing very strongly. Overall, we need some demand compression in the economy.

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Private consumption, private investment, government expenditure, exports are the four main drivers now. What else can support growth? Is there going to be a huge demand sacrifice because we were slow to act on inflation?
I do not agree that we were slow to act on inflation because given the structure of the Indian markets, one needs to withdraw liquidity to some extent before starting to raise rates. We started withdrawing liquidity much before the Fed has even touched its balance sheet and at least the RBI started withdrawing liquidity well in 2021.
When the interest rate rise came which is front loaded and with forward looking inflation, we are already at positive real rates. The deviation in real rates was never very large nor was the broad money supply growth because banks are just parking the money in the reverse repo. So, broad money was not growing. It is not money driving inflation but the big kick for inflation came from the Ukraine war and the oil price increase.

The economies are very susceptible and there is a limit to what demand contraction can do. The coordination in monetary fiscal policy, the government acting on excise. WPI inflation is much higher than CPI because it was straightaway impacted by international oil prices while CPI was mediated by what happens to taxes.

The CPI growth has been contained and after the peak in April, it has been coming down which is very healthy in the circumstances. One year ahead, it is expected to be 5%.

The April to June manufacturing sector growth is at 4.8% as against 49% year on year. How should one see this figure?
49% was really because of the steep fall in 2020. As these base effects moderate you would expect growth to come down to more reasonable levels but 4.8% is still healthy compared to in some quarters we have 2% and you know decimal growth so manufacturing is holding up that is one of the things we need to see. Private consumption, manufacturing, government consumption, these are what can support growth if next exports becomes negative.

Are you also enthused by the broad-based recovery and does this mean that the inflation growth trade off is less severe in India than in other countries?
Private consumption and fixed investment shares have gone up while the share of imports has gone up substantially. That is responsible for the slower growth that is due to the large rise in oil imports.

The services sector growth is also holding up reasonably and there is pent up demand as Covid retreats and that should continue. We see demand coming back. I have been saying that the Indian economy has reached a size and diversity that makes its growth somewhat stable and it has shown considerable resilience and surprised many of us and the rest of the world on how well we have done in absorbing the pandemic as well as the oil price shocks to which we were so sensitive.

Oil intensity has come down and the pass through depends upon demand. We are seeing that firms have reduced costs and kept margins constant despite reduced other costs. So, despite the rise in oil cost, in many cases, they have not passed on the price increase and they might not do that if demand is slow.

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