Professional forecasters have added to Reserve Bank of India (RBI) Governor Duvvurri Subbarao’s dilemma on timing the exit from an accommodative monetary policy stance.
A median forecast released by RBI in the pre-policy ‘Macroeconomic and Monetary Developments: Second Quarter Review 2009-10’ this evening lowered the economic growth projection to 6 per cent from the 6.5 per cent projected three months ago. At the same time, the forecast on inflation based on the wholesale price index (WPI) was raised to 3 per cent, as against 1.6 per cent estimated earlier.
Last week, the Prime Minister’s Economic Advisory Council headed by C Rangarajan had said the economy could grow between 6.25 per cent and 6.75 per cent, as against the 7-7.5 per cent projected in January.
| WET BLANKET Median forecast by professional forecasters | ||
| Annual forecasts 2009-10 | ||
In fact, it was the only agency to have lowered the forecast with the other projections hovering between 5.1 per cent and 7.2 per cent.
During the next financial year, the forecasters have projected a gross domestic product growth of 7.7 per cent, as against 7.5 per cent estimated in the previous survey. Inflation is expected to be 5.8 per cent.
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While the median for the forecasters’ survey was closer to the estimates released by RBI at the time of the first quarter review in July, the central bank appeared more worried about inflation than growth.
Apart from the fact that the report chose to devote most of its analysis on the growth and inflation outlook to price rise, RBI acknowledged that weak recovery and elevated levels of consumer price index-based inflation had made the policy challenges difficult. “Among the alternative plausible sources of inflation that could determine the near-term inflation outlook, factors which support possible firming up of headline inflation clearly overshadow the factors which may help in containing inflationary pressures,” it added.
Inflation based on the wholesale price index was estimated at 1.2 per cent on October 10, 2009 and RBI said that inflationary pressures had started to emerge, with WPI showing a 5.9 per cent increase over the March 2009 level and CPI inflation staying stubbornly in double digits. “From the stand point of monetary policy, anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge,” it added.
On economic growth, however, RBI appeared more optimistic and said that the survey had forecast lower growth due to the impact of the deficient monsoon on farm sector output. According to the professional forecasters’ survey, agricultural production was projected to dip by 1.4 per cent during the current financial year.
But it listed eight factors including the impact of the stimulus packages, and improved showing from the industrial and infrastructure sectors to draw comfort. The other positives listed included revival in capital flows and stock markets, improvement in overall global economic and financial conditions, improvement in lead indicators such as freight movement and data coming from sectors such as cement, steel and automobiles.
Besides, it pointed out that business confidence had improved. RBI’s Industrial Outlook Survey, conducted in July-August, also showed further improvement in the sentiments of the manufacturing sector and indicated that the industrial sector could gain further growth momentum.
The survey revealed that the demand conditions had improved, better employment prospects across sectors (with textiles being the sole exception), return of pricing power that could give rise to higher selling prices and better availability of finance. It also indicated that working capital requirement would grow in the third quarter and help reverse the decelerating trend. The only negative from the survey was higher input costs.
While inflation was the biggest worry for RBI, it also listed seven risks to growth staring with a deceleration in private consumption and investment demand. It said a contraction in credit card and consumer durables-related credit pointed to a deceleration in private consumption. In any case, non-good credit growth has decelerated in recent months to a new 12-year low in the year to October 9.
RBI said deficient rains in some parts of the country and floods in some other areas could affect rural demand. The other bad news was depressed external demand for services and contraction in non-oil imports and weak capital goods production.
“Managing this tradeoff between supporting growth and reining in inflation expectations poses a complex policy challenge,” RBI said.