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Home / Politics / Policy /  India risks deflation: Arvind Subramanian

New Delhi: Implicitly batting for a rate cut, chief economic advisor (CEA) in the finance ministry Arvind Subramanian on Wednesday cautioned that India is at risk of deflation.

“Price-wise, the Indian economy appears to be in or close to deflation territory and far away from inflation territory," Subramanian said, even as he expressed confidence that the Indian economy will grow at around 8% in 2015-16 as initially estimated in the Economic Survey.

He was addressing a press conference called to explain the government’s interpretation of the first quarter gross domestic product (GDP) numbers released recently.

The CEA has long argued that in the current macroeconomic situation, the central bank should look at both the Wholesale Price Index, which is in negative territory, and the Consumer Price Index, rather than only focusing on the latter.

His statement on possible deflation seems to be aimed at keeping up pressure on the Reserve Bank of India (RBI) to cut policy rates, without actually saying so.

RBI maintained status quo in its August monetary policy review choosing to closely watch inflationary expectations on account of an uncertain monsoon.

The central bank aims to contain retail inflation at 6% by January 2016. While retail inflation had slowed to a record low of 3.78% in July, wholesale price-based inflation contracted for the ninth consecutive month in the same month. Subramanian said retail inflation will be closer to the 5-5.5% projected in the Economic Survey.

Addressing the media, Subramanian said, “Overall economic growth is moving in the right direction, although its pace is still below what the economy needs, but a pace that is expected to pick up in response to the ongoing reforms. And one real challenge that looms ahead appears not to be price inflation but possibly price deflation."

Data released on Monday showed that GDP growth slowed to 7% in the April-June quarter from 7.5% in the January-March quarter as measured at market prices. Another measure—gross value added (GVA) at basic prices—showed that economic growth accelerated to 7.1% in April-June against 6.1% in January-March. However, it was lower when compared with the 7.4% growth in the corresponding year-ago quarter.

Subramanian said in the current macroeconomic situation, GVA estimates are a more reliable indicator of underlying economic activity.

GDP at market prices is estimated by adding net indirect taxes to GVA at basic prices. Net indirect taxes is computed by deducting subsidies from gross indirect taxes on products.

GVA is defined as the value of output produced in various sectors, excluding the value of intermediate consumption (or cost incurred in that production).

“Directionally, the latest data suggests that the economy is recovering, which is consistent with other more high-frequency indicators such as revenue collections and real credit growth," he said. “The Economic Survey had given a growth projection of 8-8.5%. Certainly if GDP numbers are reassessed, we are moving closer to 8% than currently being forecast."

He added that lower commodity prices, macroeconomic stability and lack of price rise pressures are all a positive for the Indian economy.

“Price pressures have started to contract on the commodity front. Since India is a net importing economy, global deflation will have some bearing. But having said that, the services sector, which forms a large component of the Indian economy, is seeing strong inflation," said Shubhada Rao, chief economist at Yes Bank.

She added that given the sharp fall in retail inflation, limited upside risks and the expected inflation momentum, the chances of a rate cut by RBI in its September policy have increased.

Many agencies have lowered the growth projections for India in the current fiscal year. While Moody’s lowered it to 7% for 2015-16, from 7.5% estimated earlier, Fitch lowered its forecast to 7.8% from 8%, and Standard Chartered Bank lowered it to 7.3% from 7.7%.

The Indian economy grew at 7.3% in 2014-15.

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