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RBI presages growth gloom
Recovery to start next fiscal

Mumbai, Jan. 28: Brace for the bad news: India’s economic growth this fiscal will be worse than last year — which at 5 per cent in 2012-13 was the lowest in the past decade.

In 2013-14, GDP growth will “fall somewhat short of the Reserve Bank’s earlier projection of 5 per cent,” the central bank said today in its third quarter review of macroeconomic and monetary developments, a document that was issued for the first time along with the monetary policy review. The report usually comes out a day before the policy review and is heavily trawled by pundits and reporters to glean cues before the Big Day.

But the RBI isn’t troubled by the sharp slowdown this year as it expects a moderate paced recovery next year, bolstered by rural demand, a pick-up in exports and some turnaround in investment demand.

The report said GDP growth in 2014-15 “is likely to be in the range of 5-6 per cent, with risks balanced around the central estimate of 5.5 per cent”. The forecast was predicated on project clearances translating into investment, an improvement in global growth outlook, and softening in inflation.

Growth in the second half of 2013-14 may turn out to be marginally higher than the first half, mainly because of a rebound in agriculture output and improved export performance, the report said. However, industrial growth continued to stagnate and leading indicators of the services sector exhibited a mixed picture.

“Inflation risks have to be watched carefully as we enter into the next year,” the RBI said.

The report added that headline inflation measured on the consumer price index (CPI) — the inflation gauge that governor Raghuram Rajan has shown a strong preference for over the wholesale price index (WPI) — was expected to remain above 9 per cent in the fourth quarter that ends on March 31.

The RBI said headline CPI inflation would range between 7.5 per cent and 8.5 per cent in the fourth quarter of 2014-15 with the balance of risks tilted on the upside.

The RBI’s inflation forecast was broadly in line with the goal-setting targets set by the Urjit Patel committee, which outlined the framework for the conduct of monetary policy in a report submitted last week.

The Urjit Patel report had said the CPI should be the nominal anchor for the conduct of monetary policy. It recommended a longer-term target of 4 per cent for CPI inflation with a band of +/- 2 per cent.

CPI for December 2013 was provisionally estimated at 9.87 per cent, down from 11.16 per cent in the previous month.

Given the current elevated level of CPI inflation, the Patel committee had recommended a 12-month target of 8 per cent and 24-month target of 6 per cent, before the inflation target is formally adopted.

The RBI’s forecast of a CPI inflation of 7.5-8.5 per cent in the fourth quarter of next year is within half a percentage point on either side of Patel committee’s 12-month target of 8 per cent.

One area of major concern last year was the ballooning current account deficit (CAD). The report indicates that those worries have since receded as India’s trade deficit during April-December 2013 has been 25 per cent lower than last year. The trade deficit had contracted because of a surge in exports, which was driven by the impact of a rupee depreciation and improved growth in advanced economies, the report added.

The lower trade deficit has led to a sharp decline in CAD from 3.9 per cent of GDP in the first quarter (April-July 2013) to 1.2 per cent in the second quarter.

The report said CAD was likely to be below 2.5 per cent of GDP this year against 4.8 per cent last year when the deficit soared to an unprecedented level of $88.2 billion.

The central bank isn’t overly worried about another round of Fed tapering with markets anticipating a further cut in bond purchases by $10 billion. It said the December 18 announcement when the Fed cut its bond purchases to $75 billion a month “had a limited impact on global financial markets”.

“Going forward, the spacing of the Fed’s tapering moves over the course of 2014 could influence market movements even though some of it seems to have been priced in,” the report added.

The report also said that private consumption expenditure, the mainstay of aggregate demand, had stayed low in the face of high inflation that has caused discretionary demand to fall. It added that the investment cycle had yet to turn around.

It said that the pick-up in demand in the coming year depended critically on the successful resolution of bottlenecks facing infrastructure and energy-intensive industrial projects.

The report also had one advice for the Centre: it said it was important to “create fiscal space” in 2014-15 to support public investment by restraining revenue spending to crowd in private investment.

 
 
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