Both global and domestic factors have increased the downside risks to growth. Inflation has
shown some moderation as anticipated though upside risks remain from incomplete pass-through
of rupee depreciation, suppressed inflation in energy segment and expansionary fiscal policy.
The weakening business climate is corroborated by business expectation surveys of various
agencies, as well as the Reserve Bank’s industrial outlook survey. The professional forecasters’
survey also suggests growth moderation. Most international and domestic agencies have revised
downward their earlier growth projections for the Indian economy. Even as growth slowdown
emerges as the major challenge, inflation risks persist, posing a challenge for monetary policy
in achieving low and stable inflation with minimal sacrifice of growth.
Growth outlook weakens as global
headwinds and domestic factors accentuate
downside risks
VII.1 Although a moderation in growth was
anticipated previously, developments over the
past few months in the global economy indicate
that the degree and spread of the slowdown
may turn out to be higher than earlier thought.
EDEs too have started to face slowdown
concerns as the contagion from unfavourable
global environment is weighing in on growth
prospects. OECD’s composite leading
indicators (CLI) which are designed to provide
early signals of business cycle movements,
have declined for almost all major economies.
Consumer and business confidence have been
showing signs of growing pessimism. This
could further delay recovery as fiscal space for
stimulus in the debt ridden global economy is
limited.
VII.2 Amidst weakening global growth,
India’s near-term growth outlook has
deteriorated and poses challenges for economic
management. The Reserve Bank in its Second
Quarter Review of Monetary Policy 2011-12
on October 25, 2011 revised downwards the
baseline projection of GDP growth for 2011-12
from 8.0 per cent to 7.6 per cent on the basis of
the macro-economic situation prevailing then.
Since then, developments on both the global
and domestic fronts have not been favourable
and the growth is likely to turn weaker than
earlier anticipated.
VII.3 Outlook for Agriculture in 2011-12
is encouraging. However, the headwinds
facing the domestic economy thus far, viz.,
inflationary pressures, which resulted in high
interest rates, global uncertainty and the
domestic policy environment, have adversely
impacted the industrial sector performance in
2011-12. A bigger risk arise from inflation and
the downturn in investment cycle as they pose
threat to growth sustainability. Services sector
also faces downside risks both from weakening
global demand and slowing industrial growth.
VII.4 It is possible to raise growth from
the current levels but restoration of business
confidence is the key. The pause in the
tightening of the monetary policy and further
moderation in inflation should help activity
regain some momentum. Higher IIP growth
in November 2011 and rise in manufacturing
and services PMI for December 2011 already
indicates some improvement. However, on
balance, the downside risks to real GDP
growth during 2011-12 have increased.
Inflation moderates, but risks remain as
exchange rate pass-through has enlarged
VII.5 Headline WPI inflation decelerated
since November 2011. The recent decline
in inflation has largely been on account of
the base effects and seasonal fall in food
prices, especially vegetables. Even though
food inflation has been pushed into negative
territory, inflation in protein-rich items persist
in double digits. Therefore, once the seasonal moderation ends and base effect wanes, food
inflation could revert course significantly.
VII.6 Decline of growth to below potential
is expected to ease pressures on aggregate
demand and thereby have a softening impact
on generalised inflation. Apart from this,
declining international commodity prices, has
also emerged as a favourable factor. The passthrough
of rupee depreciation and expansionary
fiscal policy, however, have emerged as major
risks, offsetting the favourable impact from
the lower demand pressures and commodity
prices. The suppressed inflation from energy
prices further complicates policy options as
revisions in these prices could be inevitable.
Wage inflation is still high in rural areas and
real wages increased, though at a lower pace
than previous year.
VII.7 Overall, the emerging trend in inflation
so far is broadly in line with the projected path
towards 7.0 per cent by March 2012. The risks
to softening of inflationary pressures, however,
remain. The policy response to emerging
macroeconomic conditions has to take these
risks into account.
Business expectations, industrial outlook
surveys suggest confidence ebbs
VII.8 Surveys conducted by different
agencies corroborate the overall moderation in
business climate. Both CII and FICCI business
confidence indices declined from the previous
quarter and the current levels are lower than
what was recorded a year ago. The latest
survey of NCAER on business confidence also
shows a decline both on y-o-y basis and from
the previous period of survey (Table VII.1).
Table VII.1: Business Expectations Surveys |
Period/Index |
NCAER-Business
Confidence Index
January 2012 |
FICCI Overall Business
Confidence Index
Q1: 2011-12 |
Dun & Bradstreet
Business Optimism
Index Q1: 2012 |
CII Business
Confidence Index
Q3: 2011-12 |
1 |
2 |
3 |
4 |
5 |
Current level of the Index |
125.2 |
51.6 |
156.2 |
48.6 |
Index as per previous survey |
125.4 |
63.7 |
143.7 |
53.6 |
Index levels one year back |
158.5 |
71.9 |
171.2 |
66.2 |
% change (q-o-q) sequential |
-0.2 |
-19.0 |
8.7 |
-9.3 |
% change (y-o-y) |
-21.0 |
-28.2 |
-8.8 |
-26.6 |
Dun & Bradstreet Business Optimism Index,
however, showed some improvement over the
survey period. Weakening demand, increased
global uncertainties, lower availability of
credit and higher input costs are seen to be
the significant factors affecting the overall
business sentiment.
Industrial Outlook Survey suggests
weakening ahead
VII.9 The 56th round of the Industrial
Outlook Survey (http://www.rbi.org.in/IOS56) of the Reserve Bank conducted during
October-December 2011, showed marginal
increase in the Business Expectation Index
(BEI) for the assessment quarter (October-
December 2011) whereas marginal decline
was recorded in expectation for the next
quarter (January-March 2012) (Chart VII.1).
The index is a composite indicator based
on assessment of several business related
parameters for the assessment quarter as well
as for the expectation quarter.
VII.10 Analysis of the net responses among
various components of the BEI indicates that
the assessment on ‘production’ was marginally
higher in Q3 of 2011-12, while the expectation
for Q4 of 2011-12 remains flat. Net response
on ‘order books’ continued to decline for
fourth consecutive quarter. Level of optimism
on ‘availability of finance’ lowered further.
While increasing proportion of respondents
reported rise in ‘cost of finance’ over previous
7 quarters, the trend appears to have reversed
for Q4 of 2011-12. Most of the respondents
felt that pressure from ‘cost of raw material’
continued and was expected to elevate further in the next quarter. The optimism on ‘selling
price’ and ‘profit margins’ further declined in
both the assessment and expectation quarter
(Table VII.2).
Consumer confidence indicate some
improvement
VII.11 The seventh round of Consumer
Confidence Survey (http://www.rbi.org.in/CCS7), conducted by the Reserve Bank in December 2011, indicates some improvement
in positive perceptions of the household after
recording marginal decline in the previous
quarter (Chart VII.2). High inflation, however,
continues to remain as the major drag factor on
overall positive sentiments.
Table VII.2 : Reserve Bank’s Industrial Outlook Survey |
Parameter |
Net Response |
Optimistic
Response |
Jan-Mar
2011 |
Apr-Jun
2011 |
July-Sept
2011 |
Oct-Dec
2011 |
Jan-Mar 2012 |
E |
A |
E |
A |
E |
A |
E |
A |
E |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
1. Overall Business Situation |
Better |
50.1 |
38.6 |
41.4 |
32.6 |
39.8 |
18.7 |
35.2 |
17.7 |
33.6 |
2. Overall Financial Situation |
Better |
41.1 |
27.1 |
33.4 |
24.1 |
30.6 |
11.7 |
26.3 |
11.2 |
25.2 |
3. Availability Of Finance |
Improve |
32.3 |
23.8 |
27.3 |
21.5 |
24.2 |
12.1 |
20.2 |
10.4 |
19.0 |
4. Cost Of External Finance |
Decrease |
-31.3 |
-42.5 |
-35.0 |
-49.0 |
-39.7 |
-50.2 |
-41.0 |
-50.6 |
-38.8 |
5. Production |
Increase |
48.6 |
41.4 |
40.0 |
32.1 |
40.6 |
22.6 |
39.9 |
25.3 |
40.4 |
6. Order Books |
Increase |
44.0 |
34.7 |
38.4 |
28.1 |
35.9 |
20.3 |
33.4 |
18.4 |
31.3 |
7. Capacity Utilisation |
Increase |
33.1 |
27.4 |
24.0 |
17.2 |
25.0 |
9.9 |
22.2 |
10.8 |
24.3 |
8. Cost of Raw Material |
Decrease |
-53.6 |
-71.9 |
-57.0 |
-65.5 |
-51.7 |
-58.1 |
-49.7 |
-61.2 |
-50.1 |
9. Employment in the Company |
Increase |
20.6 |
18.7 |
17.4 |
18.2 |
19.4 |
15.6 |
16.5 |
11.3 |
13.6 |
10. Exports |
Increase |
26.3 |
18.9 |
24.0 |
18.2 |
25.8 |
13.1 |
22.1 |
11.5 |
18.6 |
11. Imports |
Increase |
21.3 |
19.9 |
18.9 |
17.6 |
19.0 |
15.7 |
16.9 |
11.6 |
15.5 |
12. Selling Price |
Increase |
18.6 |
26.5 |
23.7 |
21.5 |
18.3 |
10.7 |
16.0 |
8.9 |
14.7 |
13. Profit Margin |
Increase |
8.3 |
-4.3 |
3.8 |
-9.9 |
2.5 |
-17.1 |
-1.6 |
-17.3 |
-2.9 |
Note: 1. ‘Net response’ is measured as the percentage share differential between the companies reporting ‘optimistic’ (positive) and ‘pessimistic’ (negative) responses; responses indicating status quo (no change) are not reckoned. Higher ‘net response’
indicates higher level of confidence and vice versa.
2. E: Expectations and A: Assessment. |
Agencies lower growth forecasts
VII.12 The Government of India had revised
downwards significantly its growth projection for 2011-12 to 7.5 per cent (+/- 0.25 per cent)
on December 9, 2011 (Table VII.3). Some of
the other agencies also had scaled down their
projections earlier even as their updates are
expected to be lower.
Survey of professional forecasters sees
weak growth and softer inflation1
VII.13 In the 18th round of ‘Survey of
Professional Forecasters’ (http://www.rbi.org.in/SPF18), conducted by the Reserve Bank,
GDP growth forecasts for 2011-12 and 2012-
13 have been revised downwards as compared
to previous survey (Table VII.4). There
has been a significant downward revision
of growth forecast for industry for 2011-
12 and for services, it is revised downwards
marginally. Average inflation is projected to
decline over 2011-12 and 2012-13. The survey
results indicate lower optimism on growth
while inflation is expected to show gradual
moderation.
Inflation expectations remain sticky
VII.14 The latest round of Inflation
Expectations Survey of Households (IESH)
(http://www.rbi.org.in/IESH26) indicate that
the perception of current quarter inflation as
well as the expectations on future inflation
have increased. The rate of increase in
expectations, however, has slowed down in the recent period. The survey was conducted
among 4000 households across 12 cities and
seven occupational categories in December
2011.
Table VII.3: Agencies’ Projections for 2011-12 |
Agency |
Latest Projection |
Earlier Projection |
Real GDP Growth (Per cent) |
Month |
Real GDP Growth (Per cent) |
Month |
1 |
2 |
3 |
4 |
5 |
Economic Advisory Council to the PM |
8.2 |
July-11 |
9.0 |
Feb-11 |
|
|
|
(+/- 0.25) |
|
Finance Ministry |
7.5 |
Dec-11 |
8.6 |
July-11 |
|
(+/-0.25) |
|
|
|
IMF* |
7.6 |
Sept-11 |
8.0 |
June-11 |
World Bank |
6.8 |
Jan-12 |
7.5 |
Sept-11 |
OECD (at market prices) |
7.6 |
Nov-11 |
8.5 |
May-11 |
ADB |
7.9 |
Sept -11 |
8.2 |
April-11 |
NCAER |
7.9 |
Oct -11 |
8.3 |
Jul-11 |
* IMF’s forecast is 7.7 per cent for GDP at market prices for
FY 2011. |
Heading into 2012-13, some challenges
persist, others arise along with some
opportunities
VII.15 In the final quarter of 2011-12 and
going forward into 2012-13, the Indian
economy has to deal with several persistent
challenges as well as some new ones. While
inflation is showing welcome signs of
moderation, which creates some space for
monetary policy to address growth concerns, it
is important to remember that demand-supply
mismatches are never very far from the surface
in a variety of commodities and services, not
to mention human capital. A sharp inflationary
response to even a modest recovery in growth
is a persistent risk, which materialised in late
2009, and against which monetary policy
has to be constantly on guard. Beyond this,
adverse global conditions, both in terms of
trade and capital flows amidst a hostile oil
price environment have clouded growth and
stability prospects for the past three years.
Table VII.4 : Median Forecasts of Select Macroeconomic Indicators by Professional
Forecasters 2011-12 and 2012-13 |
|
Actual 2010-11 |
Annual Forecasts |
Quarterly Forecasts |
2011-12 |
2012-13 |
2011-12 |
2012-13 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
14 |
15 |
16 |
1. Real GDP growth rate at factor cost (in per cent) |
8.5# |
7.6 |
7.0 |
7.7 |
7.3 |
7.7 |
6.7 |
7.8 |
7.0 |
7.6 |
6.8 |
7.6 |
7.1 |
- |
7.3 |
a. Agriculture & Allied Activities |
6.6# |
3.2 |
3.4 |
3.0 |
3.0 |
2.7 |
3.3 |
3.1 |
3.5 |
3.0 |
3.0 |
3.2 |
3.2 |
- |
3.3 |
b. Industry |
7.8# |
6.4 |
4.1 |
6.9 |
5.8 |
7.1 |
2.7 |
7.6 |
3.8 |
7.2 |
4.4 |
6.8 |
5.1 |
- |
5.8 |
c. Services |
9.2# |
9.1 |
9.0 |
9.0 |
8.8 |
9.2 |
8.9 |
9.1 |
8.5 |
8.9 |
8.5 |
9.1 |
8.7 |
- |
8.8 |
2. Gross Domestic Saving (per cent of GDP at current market price) |
- |
34.0 |
33.0 |
34.6 |
33.5 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
3. Average WPI-Inflation |
9.6 |
8.8 |
8.8 |
6.7 |
6.5 |
8.8 |
8.8* |
7.0 |
6.8 |
6.6 |
6.4 |
6.6 |
6.2 |
- |
6.3 |
4. Exchange Rate
(INR/1USD end period) |
44.6 |
47.0 |
52.0 |
45.0 |
48.0 |
48.0 |
53.3* |
47.0 |
52.0 |
46.1 |
50.8 |
45.8 |
49.3 |
- |
49.0 |
5. T-Bill 91 days Yield (per cent-end period) |
8.2 |
8.3 |
8.2 |
7.7 |
7.5 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
6. 10-year Govt. Securities Yield (per cent-end period) |
8.4 |
8.3 |
8.3 |
8.0 |
7.9 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
7. Export
(growth rate in per cent)! |
37.3 |
19.5 |
17.5 |
20.0 |
14.3 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
8. Import
(growth rate in per cent)! |
26.7 |
24.4 |
20.6 |
18.0 |
14.4 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
9. Trade Balance (US$ billion) |
-130.6 |
- |
- |
- |
- |
-37.7 |
-42.4 |
-39.0 |
-34.0 |
-38.0 |
-43.8 |
-38.0 |
-40.2 |
- |
-47.0 |
E: Previous Round Projection. L: Latest Round Projection. #: Revised Estimate.
-: Not available. *: Actual. ! : In US$ on BoP basis.
Note :The latest round refers to Eighteenth round for the quarter ended December 2011, while previous round refers to
Seventeenth round
for the quarter ended September 2011.
Source : 18th round of Survey of Professional Forecasters, Q3: 2011-12. |
VII.16 New challenges have emerged in
the form of large and rapid movements in
the exchange rate. The consequences of
these movements for both flow (balance of
payments, fiscal deficit) and stock (balance
sheet) indicators are unquestionably adverse.
However, in the event of a prolonged nonresolution
of global problems, considerations
of financial and external stability are critical. A
prudent policy approach is to accommodate the
pressure of depreciation in a way which reduces
the likelihood of a much more severe and,
perhaps uncontrollable, shock. As expectations
of a quick and robust resolution to the European
sovereign debt crisis diminish, it is all the
more important for India to maintain adequate
capacity to withstand further external shocks.
VII.17 Finally, amidst these formidable
challenges, there are clear opportunities.
Several policy initiatives that address the
critical bottlenecks of food availability,
fiscal capacity, infrastructure investment,
land acquisition and skill formation are in
advanced stages of design. Credible progress
in the implementation of even some of these
initiatives will have a dramatic impact on
the investment climate, which is essential to
the sustainability of a high-growth and lowinflation
environment. While in the short
run, moderating inflation will provide some
space for monetary policy to address growth
concerns, in the absence of structural measures
to address a range of supply bottlenecks, this
will be, at best, temporary respite.
|