How the RBI faltered in its growth projections for India

Das was a key face of the demonetisation drive in 2016. PUNIT PARANJPE / AFP / Getty Images
30 May, 2020

In a press conference on 22 May, Shaktikanta Das, the governor of the Reserve Bank of India, described India’s economic situation as an “encircling gloom.” Referring to India’s gross domestic product post COVID-19, he added, “Given all the uncertainties, GDP growth in 2020–21 is estimated to remain in negative territory, with some pick-up in growth impulses from, H2: 2020–21 onwards.” H2 refers to the second half of 2020–2021 from October to March. 

The GDP is a vital macroeconomic parameter. While the RBI predicts GDP growth using its own methodology and conducts a survey of leading economists, the government's estimates are computed by the National Statistics Office. In his latest press conference, Das remained silent on the GDP growth numbers for 2019–20. But he detailed how domestic economic activity in the country had been battered by the COVID-19 lockdown. 

“The top six industrialised states that account for about 60 percent of industrial output are largely in red or orange zones,” he said. “High-frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments. … The biggest blow from COVID-19 has been to private consumption, which accounts for about 60 percent of domestic demand.” Das seemed unwilling to camouflage the disquiet.

This was unusual for Das, who is known to be optimistic in his public announcements. This same optimism was reflected in the RBI’s GDP growth projections for 2019–2020. A post-graduate in history, Das was appointed as the RBI governor in December 2018. He is the first non-economist RBI governor in nearly three decades. Prior to his appointment, Das was the economic-affairs secretary between August 2015 and May 2017. He stood firmly behind the Narendra Modi government when it announced the demonetisation drive in 2016. Das became a key face of the move, making several public statements and holding government press conferences. He also played a vital role in sewing up the draft legislation for the Goods and Services Tax, working closely with Arun Jaitley, who was the finance minister at the time.

A month ago, on 17 April 2020, when the Indian economy was already reeling under the pandemic-induced lockdown, Das preferred to be hopeful. Referring to the International Monetary Fund’s growth projection for India for the year 2020–2021, he said, “India is among the handful of countries that is projected to cling on tenuously to positive growth at 1.9 per cent. In fact, this is the highest growth rate among the G-20 economies.” He added that “India is expected to post a sharp turnaround and resume its pre-COVID, pre-slowdown trajectory by growing at 7.4 percent in 2021–22.” 

India registered a seven percent GDP growth rate in 2017­–2018 and 6.1 percent in 2018–19.  However, since 2018, the country has seen eight successive quarters of declining GDP growth, making it the longest slowdown in the past two decades. 

Under Das, the RBI’s GDP growth rate forecast for 2019-2020 was revised a record four times. In February 2019, the RBI projected that the GDP growth rate for 2019-2020 would be 7.4 percent. In August, it was changed to 6.9 percent. In October, the RBI further revised the GDP growth rate downward to 6.1 percent. In December 2019, the figure was reduced to 5 percent. On 29 May 2020, the government announced the GDP growth rate for the year 2019-20 stood at 4.2 percent, lower than the RBI’s last estimate. 

The RBI’s quarterly growth projections were in peril too. In September 2019, Das said India's June-quarter GDP growth at five percent “came as a surprise” for the RBI.  The bank had earlier forecasted that the growth would be 5.8 percent. This triggered an internal review within the bank. “We are also examining it internally if we missed out on something,” Das told the Economic Times in an interview.  

The RBI is now toying with a new model to strengthen its forecasting abilities. In February 2020, it released a working paper titled, “Nowcasting Indian GDP growth using a Dynamic Factor Model,” which describes how it intends to catch a clearer picture of the economy in the ongoing quarter itself. In addition to the data it already monitored, the RBI has added other financial indicators such as the Sensex, non-food bank credit, and the nominal effective exchange rate, which is the value of a currency against a weighted average of several foreign currencies.

With his appointment as RBI governor, Das restored some stability to the earlier wobbly relationship between the government and the RBI. But that was the least expected from an Indian Administrative Services officer who has spent several years in the finance ministry. Prior to his term, Mint Street in south Mumbai, where the RBI is headquartered, witnessed several conflicts between the RBI governors and the government, with the central bank's autonomy coming into question. Both of Das’s immediate predecessors—Raghuram Rajan and Urjit Patel—faced government intrusions. In December 2018, amid tensions between the finance ministry and the RBI, Patel resigned before his term ended.  

However, Das has appeared to be more in tune with the government, speaking its language. In December 2019, Das delivered a speech at the India Economic Conclave organised by the Times Network. The conclave’s theme was titled “$5 trillion Economy: Aspiration to Action.”  

The title was a nod to a government-coined target of India reaching a $5 trillion economy by the year 2024–25. In her budget speech in July 2019, Sitharaman had said that in its second term, the Modi government intends to turn India into a $5 trillion economy. Subsequently, Modi spoke of this goal as “dreaming” of a “New India.” The finance minister, Nirmala Sitharaman, and the railways minister, Piyush Goyal, also spoke at the Times conclave. “We are on track for a $5 trillion economy and my focus is to achieve this target,” Sitharaman said at the event. 

In his speech, Das made no direct reference to the $5 trillion economy. He spoke at length about the important role of the central bank in creating a financial system for the 21st century, with a focus on growth. However, he did not dispute the government version of the $5 trillion economy or strike a note of caution. His presence at the event seemed to endorse the government’s rhetoric. 

Yet, several economic commentators have offered a reality check on the government’s $5 trillion economy dream. “Reaching $5 trillion by 2025 is simply out of question,” C Rangarajan, a former RBI governor, said while addressing a function in Ahmedabad in November 2019. He added that India will need a further 22 years of sustained growth to become a “developed” country.

In an article for the Indian Express, Kaushik Basu, a former chief economist at the World Bank, explained that the $5 trillion target is difficult since it is in dollar terms. “Typically, if India has higher inflation than the US, the rupee would depreciate vis-à-vis the dollar to account for that.” He noted, “The target of $5 trillion will be reached not in 2024–25, but in 2032–33. 

The COVID-19 lockdown has further dampened India’s economic growth prospects. In an interview to the Press Trust of India on 27 March, Yashwant Sinha, a former finance minister, spoke about how the lockdown may impact the GDP growth rate for 2020–2021. “My own estimate is that the 21-day countrywide lockdown which has been enforced, itself will result in shaving off at least 1 percentage point of GDP,” he said. “And if you take earlier problems created by the coronavirus pandemic before the lockdown and the uncertainties of the future, then a 2 percentage points decline in growth rate is not unlikely at all.” For now, it seems the pandemic as pushed India’s $5 trillion dream further away.