Consensus may have turned pessimistic after the release of Q1 GDP data and, relative to that, there is scope for upside surprises
However, in Q2, growth will dip by 9% from last year, as services sector metrics despite improving from Q1 remained relatively weak.
On October 9, RBI released the results of the 66th edition of the Survey of Professional Forecasters (SPF), which provides median estimates of key macro parameters that act as a useful reference point to gauge the upside and downside risks.
Growth: According to this survey, real GDP growth forecast ranges between -3% and -14.9% for FY21; the median estimate is -9.1%. RBI’s FY21 real GDP growth forecast is -9.5%, while the IMF has forecasted a 10.3% contraction. In the survey published in June, the median estimate for real GDP growth at -1.5% remained overly optimistic relative to our estimate of -5.5%. Since then, the professional forecasters have become more pessimistic, projecting -9.1% versus our forecast of -8%.
Our weekly mobility and economic recovery index had touched 76 by end-October, improving from 66 in end-September and 56 in end-August. The improvement in high-frequency data has been stronger than expected, which is the reason for our relative optimism.
The consensus may have turned overly pessimistic after the release of the Q1 GDP data and, relative to that, there is scope for upside surprises. For FY22, the real GDP growth forecast ranges between 2.9% and 10.2%, with the median being 8.2%, aligning with our forecast. The IMF’s estimate at 8.8% is slightly higher.
However, in Q2, growth will dip by 9% from last year, as services sector metrics despite improving from Q1 remained relatively weak. Fiscal spending has contracted both in nominal and real terms, as the government has tried hard to manage the fiscal deficit. However, even then the Centre’s fiscal deficit had touched 115% of FY21 budget estimate by September. This may impact the components of government consumption expenditure and “public administration, defence and other services” adversely, dragging growth in Q2. The contraction will likely reduce materially in Q3, with a positive turn starting Q4.
CPI inflation: In the June survey, our projections coincided with the median estimate of 4% for FY21. In the September survey, our estimate of 6% CPI inflation is relatively higher than the 5.6% median; this factors in the spike in vegetable prices. With the September CPI printing at 7.3%, and the October CPI also likely to remain above 7%, the median estimate is expected to be revised upwards. Effectively, there will be at least a 200bps upside surprise to inflation this year, compared to the June projections. Inflation probability assigned by professional forecasters shows that nearly a third of the respondents expect headline CPI inflation to average between 4% and 4.4% by FY21-end, while another fourth expect CPI to average between 3.5% and 3.9%. Meanwhile, 27% are projecting higher 4.5-5.4% inflation.
Monetary policy: The median estimate for the terminal repo rate is 3.75% as per the latest survey results versus our forecast of 4%. The 25bps median rate cut expectation is pencilled for Q1FY22. We think, by that time, the growth recovery would have gained sufficient momentum to obviate any need for incremental rate cuts. We are not sure whether the MPC will want to cut the policy rate. The repo rate can be maintained at the current level, while RBI continues its strategy of maintaining adequate surplus liquidity and soft yield curve control by engaging in proactive bond purchases to reduce the negative demand-supply dynamic.
Fiscal deficit: Consensus is still underestimating the upside risks to fiscal deficit, both at the central government and general government level. The median estimate of the Centre’s FY21 fiscal deficit is 7.5% of GDP, while our estimate is 8%. The median estimate of the general government deficit at 12% of GDP is also more optimistic relative to our forecast of 13%. The 1HFY21 fiscal position gives more clarity about the extent of the stress. In the first half of the fiscal, net tax revenue collection was 28% of budget estimates versus 36.8% collected in the corresponding period of FY20. Proceeds from disinvestments were 2.8% versus 11.8%, and total revenue collection was just 25.2% of the estimate versus 40.2%. Non-tax revenue collection was down 55.9%. Expenditure was 48.6% of the budget estimate, lower than 53.4% in the previous year.
Balance of Payments: The median estimate of overall BOP surplus for FY21 is $71.3 billion versus our forecast of $110 billion. Gross FX reserves have already increased by $83 billion since March, with a scope of sizeable accumulation for the remaining part of the year, given the generally favourable BOP position and particularly robust FDI pipeline. External debt on a 1-year residual maturity basis was $244 billion as of end-June, which combined with an expected current account surplus of $35 billion works out to a total short-term liquidity cover requirement of $209 billion. In terms of FX reserves, the liquidity cover works out to 268%, which is more than sufficient from a reserves adequacy viewpoint. The other metrics of reserves adequacy such as imports cover, FX reserves as a percentage of GDP, FX reserves cover to external debt, etc, have also strengthened significantly due to RBI’s large accumulation of FX reserves.
The author is India Chief Economist, Deutsche Bank AG