After two years of growth deceleration, the slowdown extended into 2013-14 amid domestic
structural constraints, dampened global cyclical conditions and dented business confidence.
Growth forecasts by external agencies and professional forecasters have been revised downwards.
Inflation expectations and inflation have begun to edge up again as the second round impact
of already high food and fuel prices has come into play. In these circumstances, the revival in
growth will require complementary monetary, fiscal and regulatory policies. At this juncture, it is
important to maintain macroeconomic stability so as to allow further impetus to growth to come
from productivity enhancing structural reforms, addressing supply constraints and ensuring quick
project implementation.
Modest improvement in growth possible in
H2 of 2013-14
VII.1 Indian economy has continued to
slowdown for the third year in succession. In
part, the slowdown is the result of global
cyclical conditions that have resulted in most
emerging markets and developing economies
(EMDEs) slowing down. However, the
slowdown has been exacerbated by domestic
factors, a large part of which can be addressed
through concerted policy actions and their
implementation. Small but sustained policy
steps can deliver growth back to the economy.
Further productivity enhancements and
containment of high wage inflation are possible
by making labour markets more flexible and
by improving human capital formation given
the abundant labour supplies.
VII.2 To recoup India’s potential growth, first
and foremost it will be necessary to secure
macroeconomic stability as failure to do so can
result in a lasting growth collapse. High
persistent inflation is inimical to growth.
Inflation based on CPI-IW has averaged 9.5 per
cent for the last six years and the headline WPI
inflation has averaged 8.6 per cent during the
last three years. Such high inflation eroded real
consumption, lowered savings, caused financial
disintermediation, widened the current account
gap and placed additional pressures for
subsidised safety nets for the vulnerable
population. Against this backdrop, monetary policy will have to tread a carefully charted
course to support reasonable real interest rates
and avert financial repression.
VII.3 Growth has slackened to a 17-quarter
low of 4.4 per cent during Q1 of 2013-14. On
current reckoning, growth in 2013-14 is likely
to stay at about the level of last year. After a
slower H1, a modest recovery is likely in H2 of
2013-14. This is expected to come from a
rebound in agricultural growth backed by a
better than normal south-west monsoon and a
pick-up in exports.
VII.4 While the current account deficit (CAD)
risks have receded somewhat, what is important
for now is that monetary and fiscal policies
retain focus on maintaining macroeconomic
stability. Meanwhile, structural policy measures
and ground-level actions could work to boost
growth over the medium-term.
Inflation may remain range-bound in H2
of 2013-14 but disinflation process is
incomplete
VII.5 The WPI inflation trajectory changed
in Q2 of 2013-14 with a turnaround since July
2013. On the current assessment, WPI inflation
may remain range bound around the current
level during H2 of 2013-14. This indicates
persistence of inflation at levels distinctly above
what was indicated by the Reserve Bank earlier
in the year. Even though non-food manufactured
products inflation remains low at present due to dampened demand-side factors and lower
commodity prices, persistence of inflation in
H2 can arise as high food and fuel inflation exert
some cost push pressures on manufactured
product prices and as high wage inflation feeds
through to general level of prices.
VII.6 An important element in shaping the
inflation outcome during 2013-14 will be
inflation in primary food articles that rose to
18.4 per cent in September 2013 mainly due to
a significant escalation in vegetable prices
during H1 of 2013-14. As a base case, food
inflation should soften during H2 on the back
of possible bumper foodgrains and oilseeds
output. However, the degree of fall in food
inflation will be conditioned by food
management, the extent of ratchet effect in
vegetable prices and supply responses in
protein-rich products.
VII.7 A fall in food inflation is a prerequisite
to bring CPI inflation to a more reasonable level
in line with the trends in emerging markets.
However, pending sufficient supply responses,
it is important that monetary policy keeps a tight
leash to prevent relative price shocks in the
current year from getting generalised. While the
negative output gap is likely to have a
disinflationary impact, supply constraints and
the absence of a sufficiently competitive
industrial structure can moderate its effect.
Persistence of CPI inflation could also come
from the second round effects of exchange rate
pass-through and administered price revisions that can impact prices across a wide range
through transportation costs. Also, inflation
expectations and demand factors can keep price
pressures elevated in services segments like
education and health.
Surveys show business confidence
continues to weaken
VII.8 The confidence channel has played an
important role in the current growth slowdown.
However, business confidence shows little
improvement and continues to remain weak. This
is indicated by moderation on a y-o-y and q-o-q
basis in key indices of various surveys (Table
VII.1). According to FICCI, weak demand, cost
and availability of credit continue to be concerns.
While the Dun and Bradstreet Business
Confidence Index showed moderate improvement
over the previous quarter, it remained below the
level registered in Q4 of 2012-13.
VII.9 The seasonally adjusted HSBC Markit
Purchasing Managers’ Index (PMI) for both
manufacturing and services contracted in
September 2013. The index for output prices
decelerated for both manufacturing and services
while input prices for manufacturing accelerated
during the month.
Industrial Outlook Survey reflects weak
business sentiment, moderation expected
ahead
VII.10 The Reserve Bank’s 63rd round of the
Industrial Outlook Survey (http://www.rbi.org.in/IOS63) conducted during August-September 2013, showed that in terms of assessment, the
Business Expectation Index (BEI) dropped
significantly for Q2 of 2013-14, falling below
the threshold level of 100, separating contraction
from expansion, and touching the lowest point
since Q1 of 2009-10. For Q3 of 2013-14, expectations remained well above the threshold
level (Chart VII.1).
Table VII.1: Expectations surveys indicate weak optimism |
Business Expectations Surveys |
Index/Period |
NCAER- Business Confidence Index Oct 2013 |
FICCI Overall Business Confidence Index Q1:2013-14 |
Dun & Bradstreet Business Optimism Index Q4 : 2013 |
CII Business Confidence Index Q1: 2013-14 |
1 |
2 |
3 |
4 |
5 |
Current level of the Index |
100.4 |
49.0 |
134.9 |
51.2 |
Index as per previous survey |
117.7 |
57.4 |
130.6 |
51.3 |
Index level one year back |
125.4 |
51.8 |
140.8 |
55.0 |
% change (q-on-q) sequential |
-14.7 |
-14.6 |
3.3 |
-0.2 |
% change (y-on-y) |
-19.9 |
-5.4 |
-4.2 |
-6.9 |
VII.11 Analysis of the net responses among
various components of demand conditions
shows that while the sentiments on production
remained broadly unchanged, the sentiments on
order books, capacity utilisation, exports and
imports dropped substantially for Q2 of 2013-
14. The outlook for Q3 of 2013-14 also shows
similar sentiments.
VII.12 Perceptions on overall financial
situation dropped substantially for Q3 of 2013-14. The cost of external finance is perceived to
rise, and the percentage of respondents
expecting this to rise has increased for the first
time since Q4 of 2011-12. Cost of raw material
and selling price are expected to increase in Q3
of 2013-14. The perception on profit margins
continues to remain in the negative terrain and is expected to deteriorate further in Q3 of
2013-14 (Table VII.2).
Consumer confidence declines
VII.13 The Reserve Bank’s 14th round of the
Consumer Confidence Survey (http://www.rbi.org.in/CCS14), conducted during September
2013 shows a decline in consumer confidence
as indicated by the Current Situation Index
(CSI) and Future Expectations Index (FEI) on
account of decrease in positive perceptions of
household circumstances, income, spending and
employment (Chart VII.2).
Table VII.2: Business confidence continues to weaken |
Reserve Bank’s Industrial Outlook Survey |
Parameter |
Optimistic Response |
Net Response1 |
July- September |
October- December |
January- March |
April-June |
July- September |
October- December |
2012 |
2012 |
2013 |
2013 |
2013 |
2013 |
E |
A |
E |
A |
E |
A |
E |
A |
E |
A |
E |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
1. Overall Business Situation |
Better |
30.6 |
16.1 |
32.2 |
17.2 |
37.5 |
18.4 |
29.6 |
12.8 |
30.0 |
7.4 |
25.7 |
2. Overall Financial Situation |
Better |
23.6 |
12.2 |
25.8 |
12.7 |
27.0 |
11.8 |
21.9 |
9.5 |
24.1 |
1.8 |
17.3 |
3. Production |
Increase |
33.6 |
18.8 |
35.7 |
18.6 |
37.1 |
18.6 |
24.4 |
9.8 |
28.5 |
10.8 |
28.9 |
4. Order Books |
Increase |
29.9 |
12.0 |
30.3 |
12.9 |
29.8 |
14.0 |
22.3 |
9.7 |
25.3 |
5.5 |
21.0 |
5. Capacity Utilisation |
Increase |
18.4 |
6.3 |
20.0 |
5.7 |
21.7 |
7.8 |
11.7 |
2.3 |
15.9 |
0.0 |
14.2 |
6. Exports |
Increase |
20.5 |
10.0 |
18.0 |
9.3 |
18.4 |
10.8 |
16.7 |
8.6 |
18.6 |
7.8 |
16.5 |
7. Imports |
Increase |
15.5 |
9.8 |
14.0 |
8.8 |
13.5 |
8.3 |
11.9 |
8.0 |
11.2 |
3.6 |
7.7 |
8. Employment in the Company |
Increase |
12.3 |
8.3 |
13.3 |
6.7 |
10.3 |
5.5 |
8.0 |
3.2 |
7.7 |
-0.2 |
4.5 |
9. Availability of Finance (from internal accruals)* |
Improve |
|
|
|
|
|
12.1 |
18.7 |
10.8 |
17.2 |
3.1 |
14.0 |
10. Availability of finance (from banks and other sources)* |
Improve |
|
|
|
|
|
13.4 |
15.3 |
12.1 |
15.2 |
3.9 |
12.0 |
11. Availability of finance (from overseas)* |
Improve |
|
|
|
|
|
3.4 |
6.3 |
5.0 |
7.0 |
-0.1 |
2.9 |
12. Cost of External Finance |
Decrease |
-24.0 |
-27.4 |
-20.6 |
-24.4 |
-18.1 |
-17.6 |
-14.3 |
-14.5 |
-12.4 |
-32.7 |
-28.3 |
13. Cost of Raw Material |
Decrease |
-51.4 |
-59.6 |
-48.6 |
-50.7 |
-45.0 |
-53.5 |
-45.6 |
-49.9 |
-43.4 |
-62.2 |
-51.5 |
14. Selling Price |
Increase |
18.8 |
18.5 |
17.3 |
10.2 |
15.8 |
9.1 |
14.9 |
7.3 |
12.1 |
11.3 |
13.9 |
15. Profit Margin |
Increase |
-3.6 |
-15.1 |
-1.3 |
-16.7 |
-2.0 |
-15.3 |
-4.9 |
-18.4 |
-3.7 |
-24.1 |
-9.3 |
1 Net response is the percentage difference between optimistic (positive) and pessimistic (negative) responses; responses indicating status quo (no change) are not reckoned. Higher ‘net response’ indicates higher level of optimism and vice versa.
E: Expectations.
A: Assessment.
*: These questions are newly added by splitting the question on Availability of Finance (both internal and external sources) inthe 61st round (Jan-March 2013). |
Further downward revision in India’s
growth projections by external agencies
VII.14 Various external agencies have reduced
India’s growth projections. The external
agencies’ growth projections range between 4.3
to 5.9 per cent (Table VII.3).
Survey of Professional Forecasters1
VII.15 The Reserve Bank’s 25th round of the Survey of Professional Forecasters outside the
Reserve Bank (http://www.rbi.org.in/SPF25) also indicated a slowdown in growth.
The median growth forecast for 2013-14 was
revised downwards to 4.8 per cent from 5.7 per
cent in the previous round, which is lower than
the growth of 5.0 per cent registered during
2012-13. Average WPI inflation is expected to remain 6.0 per cent during the current year.
Professional forecasters anticipated a reduction
in the current account deficit (CAD) with a
median forecast at 3.5 per cent of GDP in 2013-14. The survey indicated moderate slippage in
fiscal deficit (Table VII.4).
Table VII.3: Growth projections revised downwards |
Agencies’ projections for 2013-14 |
Agency |
Latest Projection |
Earlier Projection |
Real GDP Growth
(Per cent) |
Month/ Year |
Real GDP Growth
(Per cent) |
Month/ Year |
1 |
2 |
3 |
4 |
5 |
Finance Ministry |
5.0 to 5.5 |
Sept. 2013 |
6.1 to 6.7 |
Feb. 2013 |
PMEAC |
5.3 |
Sept. 2013 |
6.4 |
Apr. 2013 |
IMF* |
4.3 |
Oct. 2013 |
5.6 |
Jul. 2013 |
World Bank |
4.7 |
Oct. 2013 |
5.7 |
Jun. 2013 |
OECD** |
5.3 |
May 2013 |
5.9 |
Dec. 2012 |
ADB |
4.7 |
Oct. 2013 |
6.0 |
Jul. 2013 |
NCAER |
5.9 |
Aug. 2013 |
6.2 |
May 2013 |
*: IMF’s projection in factor cost corresponding to 3.8 per cent in market prices.
**: GDP at market prices.
|
Households’ inflation expectations
move up
VII.16 The latest round of the Inflation
Expectations Survey of Households (IESH
Round 33) (http://www.rbi.org.in/IESH33)
indicates that three-month ahead and one-year
ahead median inflation expectations of
households moved up in this quarter (July-
September 2013) as compared with the
previous quarter. The qualitative responses
indicate that majority of the respondents expect
price increases at ‘more than current rate’
(Chart VII.3).
Macro risks and inflationary pressures to
underpin policy actions
VII.17 Macroeconomic risks diminished in
the recent months, in part, due to domestic
policy actions and in part due to exogenous
factors. However, macroeconomic risks still
exist with some upward pressure on inflation and the possibility of fiscal slippage, thus
posing new challenges. Despite the recent
exchange rate stability, the external
environment for the country is still fragile and
buffers need to be rebuilt, including those by
private agents. There is little scope for
complacency at this stage, even though the
rupee has gained strength.
Table VII.4: Growth expectations decline, inflation expectations rise Median Forecasts of Select Macroeconomic Indicators by |
Professional Forecasters 2013-14 and 2014-15 |
|
Actual 2012-13 |
Annual forecasts |
Quarterly Forecast |
2013-14 |
2014-15 |
2013-14 |
2014-15 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
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 (%) |
5.0 |
5.7 |
4.8 |
6.5 |
5.8 |
5.4 |
4.7 |
6.1 |
5.0 |
6.2 |
5.0 |
6.1 |
5.6 |
- |
5.8 |
a. Agriculture & Allied Activities |
1.9 |
3.0 |
3.7 |
3.0 |
3.0 |
3.1 |
3.3 |
3.5 |
4.1 |
3.3 |
4.4 |
3.0 |
3.0 |
- |
3.0 |
b. Industry |
1.2 |
3.6 |
1.3 |
5.5 |
3.8 |
3.7 |
1.2 |
4.0 |
1.4 |
3.8 |
2.1 |
4.6 |
3.4 |
- |
3.3 |
c. Services |
6.8 |
7.1 |
6.2 |
7.6 |
7.0 |
6.8 |
6.1 |
7.2 |
6.5 |
7.4 |
6.5 |
7.5 |
6.9 |
- |
7.0 |
2. Gross Domestic Saving (% of GDP at current market price) |
- |
30.3 |
30.0 |
31.3 |
31.0 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
3. Average WPI-Inflation |
7.4 |
5.3 |
6.0 |
5.7 |
5.5 |
- |
- |
5.4 |
6.5 |
5.5 |
6.5 |
5.6 |
6.5 |
- |
5.8 |
4. Exchange Rate (`/US$ end period) |
54.4 |
- |
- |
- |
- |
- |
- |
59.5 |
62.0 |
59.5 |
60.8 |
59.5 |
60.9 |
-61.0 |
|
5. 10-year Central Govt. Securities Yield (%-end period) |
8.0 |
7.4 |
8.3 |
7.0 |
7.9 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
6. Export (growth rate in %)! |
-1.0 |
4.4 |
3.8 |
9.0 |
8.9 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
7. Import (growth rate in %)! |
0.5 |
3.9 |
-1.9 |
7.0 |
6.4 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
8. Trade Balance (US$ billions) |
-195.7 |
- |
- |
- |
- |
-50.0 |
-39.0 |
-55.2 |
-45.6 |
-47.6 |
-42.5 |
-55.0 |
-46.0 |
--47.6 |
|
9. Current Account Deficit (% of GDP) |
4.8 |
4.4 |
3.5 |
3.9 |
3.3 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
10. Central Government Fiscal Deficit (% of GDP) |
4.9 |
4.8 |
5.0 |
4.7 |
4.7 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
E: Previous Round Projection.
L: Latest Round Projection.
- : Not Available.
!: US$ on BoP basis.
Note: The latest round refers to 25th round for the quarter ended September 2013, while the previous round refers to 24th round for the quarter ended June 2013.
Source: Survey of Professional Forecasters, Second Quarter 2013-14. |
VII.18 At the present juncture, monetary
policy faces an unenviable task of anchoring
inflation expectations, even while growth
remains tepid. It is, therefore, important to craft
policy responses so that growth concerns are
addressed in an environment of stable prices
without endangering macroeconomic stability.
For supporting growth, complementary action
will be necessary aiming at productivity-enhancing structural reforms, addressing supply
constraints and ensuring quick project
implementation.
|