RBI's assumptions and economic outlook

S. Sethuraman

The mid-year monetary policy review from RBI on December 6 reflects worrisome trends with surging inflation on the back of both domestic and international price movements, especially oil, and an widening fiscal slippage in the first eight months of fiscal 2018.
This left no option to the Monetary Policy Committee, chaired by RBI, but to put on hold any cut in the key lending rate (repo) now at 6 per cent.  At the same time, its assumptions, not so well-grounded, for an 'uptick' going forward, reversing the quarterly growth declines till June last, may provide more comfort to Government in the process of budget-making for 2018/19.
After the major blow to economy from demonetisation leading to massive job losses in smaller businesses and a severe hurt to the common man in 2016/17, growth recovery in 2017/18 has thus far been tepid in the first half (April-September) at 6 per cent. This is due to lingering effects of demonetisation of 2016 into this period and also compounded by a haphazard implementation of the most prized reform, GST from July one.
GVA (Gross Value Added) had dropped to 5.7 per cent in the first quarter (April-June) though recovering to 6.3 per cent in the second quarter (July-September), which sent the Modi Government into raptures. The major hit on Government tax and non-tax revenues in the current fiscal till November is mainly relatable to the botched implementation of GST economy-wide. It has affected manufacturing, large and small, retail trades and most of services sectors.
Consumer prices have been on rise, despite reductions promised from this single tax being enforced countrywide with rate reductions on a series of items. Consequently, the drag on consumption also remains. GST is now in for major restructuring in the Finance Ministry and may get reflected in the Budget, which has to be more populist than reformist, when presented to Parliament on February 1. in the run up to the Lok Sabha Poll 2019.
The Budget has also to provide new incentives for private investment revival after four years and it would be mainly a lowering of corporate tax toward the 25 per cent set by Finance Minister Mr Arun Jaitley two years ago. Not vainly has it been said of the Modi Government that its celebratory launches of programmes and reforms in four years have not led to deliverable outcomes, in so far as sustained and inclusive growth and creation of jobs are concerned. There is too much of chest-thumping with half-baked reforms, only to be followed up with review committees of officials and, in some cases, panels headed by outside experts to re-rewrite legislation. .This underlines the Modi Government's deliberate neglect of wider consultation on major policy reforms with avoidable slur of majoritarian assertions on its governance.
Though a likely revision upwards of second quarter estimate of 6.3 per cent is indicated by CSO, RBI average at 6 per cent for the first half of fiscal 2018 remains presently.  The 'uptick' RBI has assumed in the second half can materialise only if inflation is kept within the 4 per cent trajectory (food and fuel prices in particular) and that needs also Government being able to arrest the soaring fiscal deficit and making credible progress on banking reforms.
These include recapitalisation for public sector banks with restructuring some of them, which again are subject to banks themselves initiating actions on NPAs. RBI Governor Mr Urjit Patel has said the central bank is working with the government to finalise the recapitalisation plan, which he termed as the “reform-and-recap package”. We are yet to see any action on the Insolvency and Bankruptcy Code in vogue, of immediate relevance to PSBs.
RBI Policy Review, framed by MPC, has GVA estimates at 7 per cent and 7.8 per cent respectively for the next two quarters (Dec 2017) and (March 2018). On this basis, the average taking fiscal 18 as a whole should end up with a growth rate in the range of 6.5 to 6.7 per cent. The latest RBI policy statement adheres to GDP at 6.7 per cent as in October after one reduction from the earlier 7 per cent plus projection.
Likewise, IMF and OECD had also revised down their growth estimates for 2017 to 6.7 per cent. It remains to be seen whether the growth rates are revised up by IMF in its forthcoming January update. Barring Moody's, other international credit rating agencies are withholding credit upgrades for India, preferring to wait and watch how structural reforms announced begin to play out. They all feel it is still premature to make buoyant assumptions for Indian economy's prospects and progress towards attaining its growth potential of 8 to 10 per cent.
On inflation, the Monetary Policy Committee has said in the review that the evolving trajectory needs to be carefully monitored. While it remains committed to keep headline inflation close to 4 per cent durably, it has revised up price projections for the year from the earlier 4.2-4.6 per cent range in October to 4.3-4.7 per cent in the latest review.
On growth uptick, one of assumptions made in RBI policy statement is an increase in capital raised from primary capital market (as Last year). But the projects for which capital is raised should get smoothly implemented so that it would add to demand in short term and boost growth in medium term. Also any increase in FDI flows should flow into productive sectors to help growth, RBI says. But what can be unrealistic to expect is an accelerated start on the implementation of the Insolvency and Bankruptcy Code with a Resolution Mechanism for the distressed banks. With several connected issues, it could turn into a complicated process for any quick revival of credit growth levels to such levels that would make private investment to respond and promote growth. (IPA)

Saturday, 16 December, 2017