Indian Economy: RBI’s Outlook

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TOPIC: General Studies 3

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

In News: The Reserve Bank report expects India’s economic growth rate to accelerate to 7.4 per cent in the current financial year based on pick up in industrial activity and good monsoon.

RBI’s Economic Outlook for India

RBI’s monetary policy will continue to be guided by the objective of achieving the medium-term target for retail inflation of 4 per cent, within a tolerance band of +/- 2 per cent, while supporting growth.

India’s external sector will have to confront global headwinds, but the Current Account Deficit would largely be financed by foreign direct investment. The CAD might widen owing to persistent high oil prices and large trade deficit.

• Agricultural production is likely to remain strong
• Growth impulses in industry are strengthening
• Corporates are reporting robust sales growth and improvement in profitability
• Services sector activity is also set to gather pace
• Revenue-earning freight traffic of railways has picked up, driven by stepped-up movement in coal, fertiliser and cement.
• Even though exports have gathered momentum in April-June quarter of 2018-19, the worsening global trade environment as a result of “protectionist policies” may impinge upon external demand
• Elevated crude oil prices and the strengthening of domestic demand may push up the import bill.
• Infrastructure holds the key to unleashing the impulses of faster growth. In particular, the reasonable success achieved in the transportation space is worthy of emulation in other areas

There are clear signs of recovery in terms of growth in terms of even investment and in terms of industry.

Three areas of concern that need to be weighed very closely –

Inflation: It is an election year where the government will be hard-pressed to allow continued transition or transmission of international crude oil prices increases into the retail crisis. There will be pressure to reduce the excise duty on petroleum product prices – if that happens then there will obviously be a problem of adhering to the 3.3 percent of GDP fiscal deficit target.

NPA resolution process is far from over. The report actually tells us very clearly that the size of the NPA’s in the banking sector will actually go up by the end of March 2019.

Investment growth: This will take time as people are not going to invest ill they see demand growth. So we have to judge and the best way of generating demand growth is during times of trade wars between the major economies in the world – an opportunity for us.

Conclusion:

Up-tick in credit growth is likely to be supported by the progress being made under the aegis of the Insolvency and Bankruptcy Code (IBC) in addressing stress on balance sheets of both corporates and banks, recapitalisation of state-owned banks, and a positive outlook on the economy.

Over the medium-term, the pace and quality of growth will be anchored by progress on the unfinished agenda of structural reforms in – resolution of banking and corporate financial stress; taxation; agriculture; liberalisation of the economy’s external interface, especially with FDI; and galvanising the business environment.

The confidence of the global system in Indian economy to a large extent would depend upon how stable is our currency. Already 11 percent depreciation has occurred since the beginning of this year. Indian currency must be allowed to depreciate without much disruption, without much volatility and in a gradual way. It is important to keep the currency stable and less volatile but at the same time, India needs to let the currency reflect its true competitive worth and exchange value.

A lot more needs to be done and it needs to be done soon.

Connecting the Dots:

1. Pro-active liquidity management is the key to the effectiveness of monetary policy. Discuss.