Monday, July 30, 2012

RBI- Macroeconomic & Monetary Developments - 1st QTR Review - A SYNOPSIS & COMMENT - AGREE WITH RBI IN FULL - YET URGE THAT - CRR & RATE CUT ARE NEEDED

Macroeconomic and Monetary Developments
First Quarter Review 2012-13


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.


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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