ET Now: Your latest report suggests Covid’s second wave will be credit negative for India. Could you quantify the impact on economic growth?
William Foster: I cannot quantify it right now. We are going to monitor the lockdowns and the spread of the virus to get a better sense. Only after that will we be able to come up with a GDP forecast revision.
Things are still at very early stages, but we are seeing the second wave quickly spreading beyond Maharashtra to other states. Capturing the economic impact at this moment is very difficult because there are many different scenarios that can play out.
However, it has become clear that the impact will be more negative than the forecast we currently have. We expected an acceleration — 13.7% real GDP growth for this fiscal year. But that was before the second wave; there is now an obvious, significant downside risk to that.
What of rising inflation putting pressure on growth?
There could have been more headwinds if RBI were to respond with less accommodative monetary policy at a time when you have growth pressures.
At this stage, there anyway is enough pressure on growth in terms of headwinds because of the second wave. I would imagine the RBI is going to obviously take that into consideration and try to weigh the cost-benefit of higher inflation.
It does make it a more difficult decision from a policy perspective when you have these inflationary pressures on top of the emergence of the second wave.
As long as the Fed and central banks maintain easy policy, do you think India will be a gainer in terms of fund flows?
Based on forecasts, we expect the Federal Reserve to maintain interest rates around where they are today for at least the next two years. We believe there will be a jump in inflation based on the pent-up demand being released, but we also think that overall rates will remain low.
The US is experiencing the beginning of what we expect to be a very strong recovery in growth. Now, to what extent that can benefit other countries will depend in large part on the overall outlook for growth in those countries, and a recovery from the Covid shock.
First, the world will have to emerge from the shock of the second wave. More clarity will be needed on the vaccine front and regarding effective public health responses, which I think will pave the way for stronger growth and benefits from lower interest rates. Public health response is really critical at this stage to prevent the spread of the second wave.
India was expected to grow faster in FY22, but now with the second wave how do you think that is going to change? Also, what is the risk on the fiscal deficit front?
With regard to the deficit, we think that the budget laid out a relatively transparent and achievable target, provided growth picks up the way we anticipate.
The budget pegged nominal GDP growth at around 14.4%, which translates to real GDP growth of around 10-11%. We think that is achievable, but the second wave really creates a potential scenario in which that will be difficult to achieve.
Deficit reduction could become tough because expenditure might have to be diverted away from capex, as was intended in the budget, towards public health response. With lower growth you have lower revenue generation and that would put pressure on the budgetary outcome.
But I think it is definitely too early at this stage to start forecasting any changes on that front, because we really just do not know to what extent this second wave will play out. Hopefully, it will not be too bad and if that is the case we would maintain our deficit forecasts that are aligned with what the government had indicated in February.
Could we expect a lesser impact this time because of the focus on micro-level containment?
The impact hasn’t been too bad in economies where a large number of businesses can work from home. But in informal sector-dominated economies like India, the situation is different.
In economies such as India, there is a high concentration of jobs in the services sector. Here, for real consumption to happen, people have to leave their homes and physically go to places like restaurants or haircutting saloons. For such economies, it is going to be harder to do as well as the ones with a high number of work-from-home jobs.
That is just not the structure of the economy in terms of overall livelihoods. WFH jobs in India are not a majority contributor to the overall GDP scene, though they might be high-productivity and contribute to growth. So I think we need to keep that in mind.