Mumbai : A comprehensive and well-articulated analysis and assessment of Indian Economy has been released in the RBI’s Annual Report, 2014-15. A welcome change in the Report – in fact, for the first time in its recent history – is an introduction of a new chapter called “ Governor’s Overview”, suggesting a more corporate touch (Think the Chairman’s Statement in a Corporate Annual Report).
The Governor in his review has highlighted three macro-economic challenges, what he terms as “work in progress”. First, economic growth is still below levels that the country is capable of. Second, inflation projections for January 2016 (6 per cent)is still at the upper limits. Third, willingness of the banks to cut the base rate is weak.
While not surprisingly, inflation management continues to be the Governor’s focus in flagging the macroeconomic priorities, however, financial stability has also been emphasised through reference to the financial sector, particularly public sector banks. A number of issues raised in this regard include: dealing with stressed assets of banks, bankruptcy code, greater entry and competition, and supervisory challenges. The virtues of integrating financial stability with maintaining the growth trajectory and price stability objectives, especially in the context of a market –oriented economy cannot be over-emphasised.
Turning to the REF (Real-External- Fiscal) front, as complementors of a monetary policy, the RBI has expressed concerns on all three fronts. A decline in savings and investment, as witnessed since 2010, has emerged as a strong constraint on economic growth. Fiscal consolidation- driven by cutbacks in productive capital expenditure, have been frowned upon and the RBI has suggested the need for more realistic assessment of revenue targets and expenditure allocations. The RBI’s assessment on the external sector has highlighted the contraction in merchandise exports, despite large benefits from the decline in imported crude oil price.
According to the RBI,the outlook for growth is expected to improve in 2015-16, with a 7.6 per cent projected growth, as compared with 7.2 per cent in 2014-15. The inflation decline till August 2015 has been consistent with the disinflation glide path set out. However, according to the RBI, inflation developments warrant close monitoring as part of the inflation management strategy, so as to bring inflation to 5 per cent by January 2017. In this context, the RBI has flagged a few risks such as uncertainties in weather conditions and crude prices.
The Current Account Deficit (CAD) for 2015-16 has been estimated at around 1.5 per cent of GDP, thanks to continued net inflows from workers’ remittances and software services.However, capital inflows pose greater uncertainties, especially in the wake of the China and other global developments. Nevertheless, the level of foreign exchange reserves at over US$ 350 billion- equivalent to nine months of imports- could provide a buffer and smooth out the normal import and debt servicing requirements over the year.
The RBI has again stressed on the Government following a path of prudent fiscal consolidation. The option suggested for the Government is to front load the disinvestment of government equity shares, so as to take advantage of the supportive market conditions. This will also help in forestalling cutbacks in productive capital expenditure, which are detrimental to economic growth.
The key takeaways of the RBI Report are:
l First, there is a gradual optimism in the outlook for economic growth and inflation. In the context of the China (as also other BRICS) decline, this in itself will help boost both business and consumer confidence.
l Second, a downward risk from the fiscal and external sector is not very high.
l Third, it is important to recognize the structural constraint to economic growth.
l Fourth, the asset quality of banks, in terms of stressed assets, need to be addressed.
In the above context, the following quote from the RBI Report is worth noting:
And as the RBI has rightly noted, the structural constraints to growth and asset quality concerns need to be addressed “sooner than later”.
(*The authors are Professors of Economics at the S.P. Jain Institute of Management and Research. Views are personal)
RK Pattnaik & Tulsi Jayakumar
