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Optimistic about economic revival, the Reserve Bank of India on Thursday pegged GDP growth at 7.4 per cent for 2018-19. It lowered its inflation projection, but raised concerns about relaxation in fiscal deficit goal-posts.
The RBI in its Monetary Policy Report has projected GDP growth at 7.3 per cent to 7.4 per cent in the first half of the fiscal, which it expects to accelerate further to 7.3-7.6 per cent in the second half of the current fiscal.
“Going forward, economic activity is expected to gather pace in 2018-19, benefiting from a conducive domestic and global environment,” said the report.
Factors including stabilisation of the Goods and Services Tax, improved credit offtake, strengthening investment activity, recapitalisation of public sector banks and resolution of distressed assets under the Insolvency and Bankruptcy Code, improved global trade as well as the Budget’s focus on rural and infrastructure sectors, are expected to spur growth. The growth forecast is a sharp rise from the 6.6 per cent GDP growth in the last fiscal and is in line with the Centre’s growth expectation of over 7 per cent this fiscal. The Economic Survey had projected that the economy would expand between 7 and 7.5 per cent in the current fiscal.
Significantly, pointing out large frequent revisions in national accounts data, the RBI report has said that advance estimates of GDP and GVA growth “may need to be supplemented with high-frequency indicators to arrive at a realistic assessment of the state of the economy”.
An analysis of revisions of annual growth rates of major components of GDP in India between the first release and the latest available release shows a generally upward bias, it added.
Inflation
The RBI has also lowered its projection for consumer price index (CPI)-based inflation, but has warned of upside risks, including global crude oil prices, higher house rent allowance by States to their employees, as well as fiscal slippage.
Expecting moderation in food prices and normal monsoons, it lowered the retail inflation target for the first half of the fiscal to 4.7 per cent to 5.1 per cent.
It has also marginally lowered its inflation outlook for the second half of the fiscal to 4.4 per cent from the previous projection of 4.5 per cent to 4.6 per cent.
“Second order effects of the expected increases in HRA, including by State governments, can impact inflation expectations. Other major risks to the inflation outlook are crude oil and other commodity prices, the proposed revisions to MSPs for kharif crops and fiscal slippage at both the central and State levels,” said the report.
Additionally, the RBI lowered the inflation outlook for the fourth quarter of 2017-18 to 4.5 per cent from the 5.1 per cent it had projected previously.
The report has also warned of fiscal slippage by the Centre and the States, which would not only further fan inflation but would also raise borrowing costs.
“Given the present levels of the combined (Centre and States) fiscal deficit, an increase in the fiscal deficit to GDP ratio by 100 basis points could lead to an increase of about 50 basis points in inflation,” it said, adding that it also has broader macro-financial implications such as economy-wide costs of borrowing which have already started to rise.
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