RESERVE BANK OF INDIA
Macroeconomic and Monetary
Developments
First Quarter Review 2012-13
A SYNOPSIS & COMMENT
The Reserve
Bank of India today(30th, Jul,2012) released the Macroeconomic and
Monetary Developments First Quarter Review 2012-13 - as a backdrop to the First
Quarter Review of Monetary Policy Statement 2012-13 to be announced on July 31,
2012. As Usual, RBI’s insights are extremely interesting and highly readable.
Overall
Outlook:
Inflation
and macro-risks to condition growth-enabling policy actions :
Even as the
growth outlook remains weak, inflation is likely to be sticky during
2012-13. As such, inflation and
macro-risks will condition growth-enabling policy actions with a view to
supporting recovery in a non-inflationary manner.
The
near-term outlook on inflation continues to be marked by a number of upside
risks, despite the significant slowdown in growth.
Professional
forecasters as well as external agencies have lowered growth projections.
Surveys of business expectations confirm that confidence levels are low.
Improving
the investment climate by moving quickly to address bottlenecks in
infrastructure space and removing constraints on FDI are important.
Global Economic Conditions:
Global
growth prospects have deteriorated with growth in EDEs also slowing down.
Persistent
euro area problems and weakening growth in emerging and developing economies
(EDEs) will be a drag on global growth in 2012.
The
deceleration in growth in the BRICS nations, which have so far been drivers of
EDEs’ growth, has added a new dimension to the global slowdown, making
near-term recovery difficult.
Recent
indications suggest that global trade flows have ebbed again after some pick-up
in Q1 of 2012. This trend could persist because of tight credit conditions,
adverse impact of deleveraging on trade finance and growth slowdown in EDEs.
Global
financial market stress resurfaced due to the deepening crisis in the euro
area, especially in Greece and Spain; the Libor fixing scandal has added to the
uncertainty.
Indian Economy
Risks to
growth have increased; output likely to stay below potential during 2012-13.
Available
information suggests that slowdown has extended into Q1 of 2012-13, and output
expansion in 2012-13 is likely to stay below its potential.
Newer risks
to growth have arisen from slowing global trade, domestic supply constraints,
bottlenecks of industrial inputs particularly with regard to coal and
electricity and less-than-satisfactory monsoon so far.
Until July
27, 2012, the monsoon was deficient by 21 per cent compared with the long
period average. In terms of the Reserve Bank’s production weighted index, the
deficiency was 24 per cent. This is likely to impact kharif crops, especially
coarse cereals and pulses.
The Order
Books, Inventory and Capacity Utilisation Survey show a seasonal improvement in
capacity utilisation levels in Q4 of 2011-12, but the Industrial Outlook Survey
indicate that capacity utilisation has declined in the subsequent quarter.
These Surveys are conducted by the Reserve Bank.
Services
sector growth is showing signs of decelerating in line with slowdown in
industrial growth and weak global economy.
Aggregate Demand
Government
needs to curtail subsidies and provide an investment stimulus.
The
investment outlook remains sluggish. Investment intentions in the new projects
sanctioned financial assistance moderated to Rs.2.1 trillion in 2011-12 from Rs.3.9
trillion in 2010-11. Corporate investment is expected to decline further during
2012-13.
Sales of
private, non-financial firms moderated in Q4 of 2011-12. Along with high input
cost pressures, this led to declining corporate profits.
The fiscal
deficit target for 2012-13 is at a risk of being breached due to likely
overshooting of subsidies and shortfall in receipts.
To address
this risk, fiscal space needs to be created by curtailing subsidies and significantly
boosting government capital expenditures to provide an investment stimulus to
the economy, which would help crowd-in private investment.
External Sector :
CAD risks
and concerns about sustainability persist.
Softening of
global crude oil prices and moderation of gold imports may slightly lower
current account deficit (CAD) in 2012-13, but risks remain, especially with
slowing global growth and trade and low price elasticity of import demand.
Services
exports (net) at US$14 billion in Q1 of 2012-13, have declined by about 12 per
cent year-on-year. Current indications are that software export earnings may
even be lower than projected by NASSCOM.
High
external debt, deterioration in the net international investment position and a
moderate decline in forex reserves have weakened the resilience to external
shocks.
CAD-to-GDP
ratio touched an all-time high of 4.2 per cent of GDP in 2011-12. With slower
growth, sustainable level of CAD has also come down to around 2.5 per cent of
GDP.
Monetary and Liquidity Conditions
Monetary and
liquidity conditions have eased and are not significantly impinging on growth.
A 50 bps
repo rate cut, following a 125 bps CRR reduction, coupled with active open
market operation purchases have significantly eased monetary and liquidity
conditions during 2012-13 so far.
While the
rate of deposit expansion is slow, credit growth has picked up in the current
financial year in line with the indicative projection. The flow of resources
from non-bank sources has also been good.
Though there
has been some rise in nominal and real interest rates during 2011-12, computed
real weighted average lending rates (WALR) are currently significantly lower
than the pre-crisis period of 2003-04 to 2007-08 when the investment boom took
place.
Financial Markets
Currency and
equity markets face pressure; stress may stay with rise in leverage.
Spillovers
from global financial market uncertainties and waning investor confidence
amidst deteriorating macroeconomic conditions, have kept domestic currency and
equity markets under pressure.
The Reserve
Bank’s House Price Index (HPI) show that housing prices increased further
during Q4 of 2011-12 in most cities, though transaction volumes fell in many
cities.
Going
forward, financial stress is likely to remain with falling earnings and high
leverage for non-financial firms and global uncertainties.
Price Situation :
Inflation
pressures persist despite weakening growth momentum.
Inflationary
pressures have persisted, with significant contribution from food and energy
segments. Inflation expectations also remain sticky.
Going
forward, the decline in global commodity prices will provide some relief, but
the gains have been partly offset by rupee depreciation.
Risks to
inflation remain from unsatisfactory monsoon and increases in MSP even as
growth slowdown eases demand pressures. While core inflationary pressures are
currently muted, a continued rise in real wages may spill over to core
inflation.
Persistence
of inflation, even as growth is slowing, has emerged as a major challenge for
monetary policy.
MY COMMENTS :
This is what
RBI says – in its review. We will need to watch out for the monetary Policy on
31st,July,2012. Most of the things, that RBI says – are very true –
and in these things – RBI is obviously very right – and we do not disagree with
RBI’s assessment.
But then, the trouble finally is – whose BABY is the
country’s Growth? Will Government divert unproductive funds to capital
expenditure purposes – and stimulate the Economy & Growth? Which
unproductive Funds will it divert to Growth?
In my view,
subsidies on items like Diesel, Petrol and Gas – can only be reduced , when the
Inflation is down to around 4%, when Public can bear the increased Prices. This
reduction in Subsidies is clearly inflationary. Not only Inflationary in
themselves, but, they will fuel all-round inflation spiral – in all sectors of
economy. It would be TOTALLY INCORRECT to cut these subsidies NOW, when everyone
agrees that there are already HIGH INLFATIONARY PRESSURES.
Government
must cut some UNPRODUCTIVE EXPENDITURES or postpone them for a while. For
instance, a scheme like NREGS can be cut upto 50% of its present level. Or, the
subsidy on such schemes can at least be postponed totally to the 4th
Quarter, or Next year, by which time Inflationary pressures may have eased and
Growth too may have picked up. We
certainly need Growth – and the present Growth at 5% is too measly, for a
developing Nation like ours – even though, it may be good enough for a well
developed country like USA. There could be the usual Austerity measures on
Postponable expenditures – like axing voluntary trainings, cutting down on A/C,
reduction in tours and so on. Government is aware of all that. This is
reduction in expenditure. But, diverting this saved money to INFRASTRUCTURE and
other productive schemes is more important and more difficult.
But, though
difficult, it is possible and can be done much faster.
The more
important things is – Government must become focused on INVESTMENT, both FDI
and Indian Investment. Government must invite FDI, where people want to come
rather than always looking at risky areas like FDI in RETAIL. What the Bihar
CM, the WB CM and others say on FDI in Retail is very much True, though they
did not tell everything. First, enable
our Retailers to upgrade themselves significantly. Train them, finance them,
regulate them, make them more efficient – but don’t kill them with someone too
strong for them to compete with - from
other countries. Some one could say – these are just fears. But then, why are
we rushing in – without knowing how these MNC retails are functioning in other
countries? Let there be a WHITE PAPER on it first – before we jump into the
fray.
Even USA has
hinted at FDI in sectors like Defence Production, Aerospace etc. These sectors
are good for India in many ways. Why not invite FDI in such sectors with OPEN
ARMS?
Entrepreneurs
like LN Mittal want to invest in Steel – but find it difficult to go through
our painfully slow and sloppy laws. Can no one in Government clear their
proposals Quickly? We want FDI and we are getting FDI and with Huge employment
Potential. Why not get it? There are many areas where high technology and FDI
are welcome. Even Electronics, TVs,
Mobile Phones manufacture are prominent ones for FDI. We purchase the
largest number of Mobiles – but almost all of them come from Outside. Why are
the manufacturers not being asked to establish their manufacturing centres
here? Ditto with Telecom Equipment. We steel need huge amount of Telecom
equipment. We always go for Global orders – and get them even from sources like
China. Why not invite the best to manufacture in India – and then float LOCAL
TENDERS, instead of Global tenders? If
China can do it – why can’t we?
Tackling Food Inflation is – only by
augmenting supplies and regulating their prices to some extent. Government is
aware that Rains are short. But, are they aware that they should up the supply
chain VERY FAST- through imports and
release of Food Grains from Government Godowns and so on.
It would be unkind (almost Inhuman) to argue
that DEMAND for food items must be cut – whether by Monetary Policy or by
Fiscal Policy – to reduce Inflation. That is not a policy option at all. It is
as good as saying that we should REDUCE OUR POPULATION OVERNIGHT!
The point is
– are the Ministries of Food and Agri – at Centre and also in States – really
aware of the challenges that they need to meet NOW – to augment supplies; meet
shortages – and also reduce Food Inflation with all the means at their command?
RBI has of course talked of that – in its own way – so many times?
ALL SAID – I
AM STILL NOT CONVINCED THAT RBI SHOULD NOT BE REDUCING CRR OR REPO RATE OR
BOTH. I think, RBI must be doing that. It should bat for Growth – even while
urging Governments to act from supply side. A High Interest Rate regime has not
reduced INFLATION in last 1 ½ years – BUT HAS CERTAINLY AFFECTED GROWTH
ADVERSELY.
Somewhere, the Goals of RBI and Governments must meet – and the
focus must become ONE.
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