BackIndian economy has bottomed out, says PM’s council
PM?s council says worst is over, after economy was estimated to have grown at its slowest pace in a decade
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New Delhi: The International Monetary Fund (IMF) was the first to say so. Now the Prime Minister’s economic advisory council (PMEAC) has confirmed it: the worst is over for the Indian economy, estimated to have grown at its slowest pace in a decade in the fiscal year ended 31 March.
The council, headed by former central bank governor C. Rangarajan, in its review of the economy released on Tuesday, said gross domestic product (GDP) is expected to grow 6.4% in the current fiscal as delayed projects are fast-tracked and the full impact of policy measures taken by the government kicks in.
Ahead of the Reserve Bank of India’s (RBI’s) monetary policy review on 3 May, the council said a decline in the inflation rate will create more space for monetary policy easing to support economic growth. It, however, acknowledged the risk that political uncertainty ahead of the general election due next year may trip up growth and affect investment.
“Significant improvement from the current very low levels of economic growth is certainly
feasible. If conversion of investment to yielding assets and the improvement in investment and confidence conditions are greater, it is even possible that growth could be slightly higher," it said.
Asia’s third largest economy is estimated by the government to have grown 5% in the year gone by, the slowest in 10 years, as high borrowing costs and a funding crunch forced companies to put investments on hold and prompted consumers to reduce spending. The European debt crisis and faltering US economic growth, meanwhile, pared demand for Indian exports.
The forecast by PMEAC follows IMF’s World Economic Outlook released last week that said growth in the Indian economy had bottomed out and would recover on the back of improved external demand and recent policy moves by the government.
IMF, however, cut India’s growth projection to 5.7% for 2013 from 5.9%, citing structural challenges that could lower potential output over the medium term and also keep inflation elevated by regional standards.
The Asian Development Bank earlier this month projected India’s economic growth at 6% in 2013-14. The government’s annual Economic Survey in February forecast that the economy will grow in the range of 6.1-6.7% in the current fiscal year.
Even though the investment rate has moderated to 35% in 2011-12 from 36.8% a year prior, PMEAC said the current level of savings and investment is high enough to sustain 7.5-8% growth if delays in project implementation are overcome.
D.K. Joshi, chief economist at rating agency Crisil Ltd, which has revised its growth projection down to 6% from 6.4%, said the council’s growth projections look optimistic.
“In the short term, it is possible to increase growth given the current investment and savings levels if the resource efficiency improves. However, in the long term, to sustain high growth levels, the investment rate has to increase," he said.
The council’s report projects economic growth to average 6% in the first half (April-September) of the current fiscal and accelerate to 6.7% in the second half (October-March) of the year.
PMEAC said that though a correction in wholesale price inflation is desirable, it may not happen because of increases in the prices of refined petroleum products, fertilizers and electricity that may exert pressure on the inflation rate.
The council has projected inflation based on the Wholesale Price Index (WPI) at around 6% in 2013-14. In 2012-13, WPI inflation averaged 7.35%, with inflation moderating to a 40-month low of 5.96% in March.
With inflation easing and the government pressing ahead with fiscal consolidation, RBI has some elbow room in its conduct of monetary policy, PMEAC said. “Domestic growth conditions suggest more easing, but on the other hand, the external payments situation also needs to be borne in mind," it said while being critical of RBI for not easing tight liquidity conditions.
RBI raised policy rates 13 times between March 2010 and October 2011 before a 50 basis points cut in April last year. A basis point is 0.01%. It paused for nine months before declining inflation and faltering economic growth prompted policy rate cuts by 25 basis points each in January and March. The repo rate, at which the central bank lends overnight money to banks, is now 7.5%.
The council admitted that the current account deficit (CAD) was a source of concern and said a significant correction in CAD will take more than a year. It advocated encouraging capital inflows to ensure CAD of around $100 billion ( ₹ 5.4 trillion) is financed in the current fiscal year.
PMEAC expects CAD to moderate to 4.7% of GDP in 2013-14 from a projected 5.1% in the previous year. CAD touched a record high of 6.7% in the third quarter (October-December).
The council said CAD could exceed the projected level if demand for gold imports does not abate, merchandise and services exports do not improve, and the oil price spikes on account of any military conflict in West Asia.
PMEAC projects gold imports to moderate to $45 billion in 2013-14 from $56 billion a year ago, while oil imports are expected to touch $125 billion from $110 billion last year.
N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, said channelling savings into financial instruments and away from unproductive assets such as gold will be crucial in curtailing CAD.
“The recent developments in the international commodity markets, especially the sharp fall in gold and crude prices, will help us in reducing the current account deficit in a substantial manner," he said.
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