The government will have to do its bit to help for a faster recovery and start spending at the earliest, Axis Bank's chief economist Saugata Bhattacharya said on Thursday, estimating the FY22 GDP growth to come at between 9.5-10 per cent. The Reserve Bank, which was the earliest to act with rate cuts and liquidity enhancement measures, has run its course now and will play a limited role in the recovery by ensuring stable financial conditions, Bhattacharya told reporters on the eve of the central bank's bi-monthly policy review. He said private consumption has fallen and there has also been a hit to spends on consumer staples.
There is a need to revive it by upping of spending by the government, especially on the capital expenditure it has listed out, he said. The government may be waiting for the lockdowns to end before they can announce specific measures for the revival, which can have the best multiplier effect. "I hope they spend soon," he added. Bhattacharya said he feels consumption will be impacted at least till December quarter and the hit to demand will continue even after the lockdowns are lifted. He said the RBI is most likely to revise down its 10.5 per cent GDP growth estimate for FY22, which would be more like an acknowledgement of the reverses being faced in the ongoing June quarter. He expects the RBI's new estimate to be over 10 per cent real GDP growth.
The bank's internal view is that growth will come anywhere between 9-10.5 per cent, Bhattacharya said, adding that there is a 60-65 per cent chance of it being between 9.5-10 per cent. Vaccination holds the key on the growth front going ahead, he said, warning that if the inoculations fall short, it can shave off 1 percentage point from the GDP growth estimate. The chief economist also said that he is sceptical if the government will be able to inoculate over 40 per cent of the population with both doses by September or October. However, one of the most keenly watched aspects of the policy review will be RBI expectations on inflation and commentary surrounding it, he said, adding that the inclusion of the word "transient" in context of the inflationary pressures will mean a lot on the central bank's stance.
Bhattacharya said he expects the RBI to hold rates on Friday, as per the consensus view, and added that he expects a pause till FY23 as the focus is on being accommodative in stance and help in reviving growth. Friday's policy moves can be accompanied by a second government securities acquisition programme announcement, with a commitment from the RBI to buy another Rs 1 lakh crore of bonds in a given time frame, he said.
Bhattacharya said the RBI will continue to support the government's large borrowing programme and what needs to be seen is whether it lets the yields go up to 6.2-6.3 per cent or makes it stick to 6 per cent as per the current stance. The RBI will not reverse its growth-enhancing measures and liquidity moves till the December quarter, he said, adding that it may advance the same by a quarter if the taper programmes in advanced economies start earlier than expected.