GDP growth to turn positive in Q3: RBI analysis

The Reserve Bank of India, in its latest bulletin on 'State of the Economy', says that positive indicators show the economy is pulling out of  COVID-19's  "deep abyss " and is breaking out towards a place in the  "sunlight". "Although headwinds blow, steadfast efforts by all stakeholders could put India on a faster growth trajectory," an article written by the RBI officials says.

India recorded its worst-ever quarterly growth amid strict coronavirus lockdowns in the April-June quarter, which saw a slight improvement to 7.5 per cent in the second quarter. In its previous article, the RBI researchers said the GDP would shrink 8.6 per cent for the July-September quarter and that India would enter into a recession.

The economy is reflating at a pace that beats most predictions, which was evident after the National Statistical Office data for the second quarter was released, says the report.

The latest economic activity indicators suggest the real GDP growth is expected to break out into positive territory in Q3 - albeit, to a slender 0.1 per cent, it reads.

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It says the RBI sent a powerful message by maintaining a status quo in terms of policy rates in Q2. "Growth projections - the intermediate target under a flexible inflation targeting framework and the most potent communication tool --  were revised upwards by 200 basis points from October and if they hold,  the Indian economy will clock a growth rate of 14.2 per cent in the first half of  2021-22 on top of 0.4 per cent in the second half of 2020-21," the article says.

Two important forces are conspiring to bless this turning of the page on the virus, it says. "First, India is bending the  COVID  infection curve:  since mid-September, barring localised surges,  infections are slanting downwards week after week, and the recovery rate1 is nudging  95  per cent," the article added.

The RBI says a series of positive aspects are helping India get out of negative growth trajectory.   A battery of vaccine candidates has successfully hit not only trial status but also suitability for transportation/trials/usage. "Second, it is now getting clearer that there is a system to the fiscal stimulus, a 'method' if you will," says the RBI.

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Starting out with liquidity and cash, it is transiting in a calibrated fashion to supporting investment and consumption demand. The fiscal measures have been sequenced in a designed shift in focus from consumption expenditure in Pradhan Mantri Garib Kalyan Package (PMGKP) to investment expenditure in Aatma Nirbhar 2.0 and 3.0, the article opines.

"On the whole, the above-the-line fiscal stimulus will likely boost growth by close to 2 per cent of  GDP  in  2020-21," says the RBI.

In its conclusion, the RBI said the overall underlying trend reveals there's a pick-up in momentum of economic activity after the start of H2.

"The absence of the dreaded 'second wave' of the pandemic in India so far has imparted elevation  to  this  momentum."

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The article reads contractions estimates of various agencies for the year are being trimmed, and if the trend continues, the bounce back expected in the last quarter of the year may be stronger than expected.

"At the same time, efforts need to be redoubled to excoriate the 'worm in the apple' - inflation - before it hurts the impulses of growth that are taking root," they said.

The article says the views expressed in the article are those of the authors and do not necessarily represent the views of the RBI.