The Union government and the central bank need to act decisively on a fresh fiscal stimulus and a steep interest rate cut in order to drive India’s economic growth out of the crisis it is in currently, said industry leaders and economists. Indian economy has contracted at the steepest pace in four decades.
India’s (GDP) shrank by 23.9% year-on-year in the June quarter. It had expanded by 3.1% earlier this year, in the March quarter. Analysts expect the Reserve Bank of India (RBI) to cut policy rates by 50-75 bps this fiscal to put the economy back on the rails. RBI has cut rates by 40 bps since 1 April to 4%.
“We believe the current stagflation scenario is transitory and policy rates will be reduced by an additional 50 basis points cumulatively, starting in December when inflation eases,” Nomura Securities stated in a report on Tuesday. Bank of America Global Research demanded RBI to follow up on the necessary measures required to soothe bond yields and to function orderly in these market conditions, with additional rate cuts of 75 basis points by March 2021.
“The next round of policy stimulus is likely to be targeted and could take the form of an expanded scope of cash transfers, public employment programs in urban areas, along with the continued focus on public investment,” Nomura bank suggested.
The contraction occurred due to a steep fall in domestic demand, reflecting the impact of the strict lockdowns. The services sector, construction industry, manufacturing and trade industries were adversely affected.
“The negative GDP can become plus by January, provided the government incentivizes realty and also provides liquidity. We are also hoping for labour to return to work faster. Also, demand for commercial realty will pick up once GDP moves back into the positive territory. If GDP is zero or minus, then commercial demand will be impacted,” stated Niranjan Hiranandani, the managing director of Hiranandani Group.