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RBI growth concern deepens

OUR SPECIAL CORRESPONDENT

Mumbai, Jan. 23: The Reserve Bank of India (RBI) could further trim its growth forecast for the year ended March 31 from the 7.6 per cent it projected in the second-quarter monetary policy review on October 25 last year. In its macroeconomic policy document released a day before it announces the monetary policy, the central bank said India's economic growth had weakened more than it had anticipated last October. An independent survey of financial forecasters — who are normally consulted before each quarterly review — appeared to buttress that view by slashing their median forecast for GDP growth in 2011-12 from 7.6 per cent made last October to 7 per cent now. The tenor of the report seemed to suggest that the RBI would trim its growth forecast in line with other independent forecasts by several groups of analysts. However, it cautioned that food inflation — which has turned negative in recent weeks — could soar in the months ahead, spelling greater woes for kitchen budgets across the country as the seasonal factor wears off and the base effect of the wholesale price index (WPI) wanes. The Macroeconomic and Monetary Developments: Third Quarter Review 2011-12 saw the apex bank flagging growth concerns. It said that at a time global growth was sputtering, India's near-term growth outlook had deteriorated and this posed challenges for economic management. "Growth in India is moderating more than was expected earlier. It is likely to be below potential during 2011-12, but is expected to recover at a modest pace in 2012-13," the RBI said. The central bank had earlier lowered the GDP projection for the fiscal on the basis of the macro-economic situation prevailing then. But since then, developments on both the global and domestic fronts have not been favourable and the economic growth is likely to turn weaker than earlier anticipated. "This is an ample indication that the RBI may again prune its GDP growth forecast tomorrow. However, one cannot say if there will be a cut in the cash reserve ratio (CRR) as well based on these observations," an analyst said. The central bank said though growth could be raised from the current levels, restoration of business confidence was crucial. Surveys conducted by various industry bodies have shown that business confidence has been badly dented. Moreover, the 56th round of the Industrial Outlook Survey of the Reserve Bank also showed a marginal decline in expectations for the January-March quarter. The central bank also indicated that it would continue its watch on inflation which had moderated recently. Admitting that the moderation in inflation is creating space for monetary policy to address growth concerns, it said that there were some risks on this front as well. Food inflation, which has been on the decline, could reverse, the RBI said, adding there was a persistent risk of a sharp inflationary response to even a modest recovery in growth. Currency pressures also pose another risk to inflation. "Depreciation of the rupee has accentuated input cost pressures and poses a risk to the inflation trajectory. It was expected that with moderation in global commodity prices and dampened domestic demand, inflation should fall quickly in 2012. The pass-through of sharp depreciation of the rupee since August 2011 has more than offset this favourable impact and prices of metals, chemicals and textiles have increased significantly," the report noted. The RBI also pitched for expediting economic reforms, including reduction of subsidy along with the implementation of the direct taxes code and the goods and services tax, to contain the fiscal deficit, which is expected to exceed the budget estimate. Unless fiscal reforms are expedited, the Centre could miss the rolling target of fiscal deficit at 4.1 per cent of GDP for 2012-13 as set out in 2011-12 budget, it said. It said the government needed to move towards the deregulation of pricing of diesel to check subsidies.