Outlook for economy remains weak

Growth for 2012-13 pegged 0.2-0.8 percentage points lower than the 6.5% for 2011-12

The Reserve Bank of India (RBI) on Monday said that the outlook for the Indian economy remained weak, indicated by lowered growth projections by professional forecasters and external agencies.

“In an uncertain global economic environment, factors like the interplay between growth slowdown, high inflation, wide current account, fiscal gaps and falling investment have weakened the economy,” said RBI in its Macroeconomic and Monetary Developments First Quarter Review 2012-13 released on Monday.

The central bank said various surveys of business expectations confirmed confidence levels are low. It pointed out that the NCAER Business Confidence Index, which registered an improvement in business environment during April 2012, slid back during July 2012. 

HIGHLIGHTS

• Inflation Expectations Survey of Households conducted in June indicates the median inflation perception for April-June and median inflation expectations remained at the same level
• Ficci Overall Business Confidence Index Q2: 2011-12 had a QoQ decline of 0.2% and a YoY decline of 32.3%
• The IMF, in its July update of the World Economic Outlook, has made significant downward revisions in its current year growth estimates for India, the UK, Brazil and China
• The Reserve Bank of India’s production weighted rainfall index showed a 39% drop from the normal during June 2012

Similarly, it noted that the Dun & Bradstreet Business Optimism Index for July-September 2012, conducted in June 2012, indicated increased pessimism, with a quarter-on-quarter decline in volume of sales, net profits, new orders, inventory and employee levels.

RBI said the revised gross domestic product (GDP) growth estimate for 2011-12 at 6.5 per cent had come in sharply lower than the conservative estimates by external agencies (7.0-7.6 per cent). RBI said stuttering global growth and domestic concerns on multiple fronts — including weak Index of Industrial Production (IIP) growth momentum, persistent inflation, and high fiscal and current account deficits — have led to further downward revisions in the growth outlook for 2012-13 by 0.2-0.8 percentage points.

The RBI’s Consumer Confidence Survey conducted in June 2012 also indicated that though the majority of respondents perceive current household circumstances to have improved, there has been a rise in the proportion of respondents reporting otherwise. This led to a fall in consumer confidence for the current period.

Further, RBI’s Industrial Outlook Survey conducted during the first quarter of 2012-13 showed deterioration in business sentiments, both in the assessment quarter first and the expectations quarter second of 2012-13.

Among the others, RBI said the Confederation of Indian Industry (CII) business confidence index and HSBC Markit Purchasing Managers’ Indices (PMI) for manufacturing and services (June 2012) indicated some optimism.

While the CII confidence index registered moderate recovery and indicated optimism about overall sales, new orders and pre-tax profits in the first quarter of 2012-13, the PMI suggested improved business conditions and rising output.

RBI further pointed that the Business Expectation Index, a composite indicator based on several business parameters, also showed moderation for assessment (first quarter of 2012-13) and expectation (second quarter of 2012-13) quarters. RBI said though the industry and service sector median growth forecasts have turned low, they are expected to pick up from the beginning of the second quarter of 2012-13.

“Decisive policy action backed by credible commitment to a long-term strategy for correcting macroeconomic imbalances and stimulating investment is crucial at this stage to revive confidence as well as provide space for monetary policy to help sustain growth while keeping inflation under control,” said RBI in its review.