New Delhi:
The Reserve Bank of India annual report for the year 2011-12 has highlighted that inflation is the biggest enemy for India’s economic growth. The review and prospects section of the annual report has ‘inflation’ mentioned 66 times.
Here are 10 things to note:
1) Inflation: Inflation is likely to remain sticky around 7 per cent with upside risks emanating from a deficient monsoon. The most serious consequence of inflation is its adverse distributional impact on the poor, people without social security and pensioners. Poor households are unable to maintain the consumption levels at current prices and therefore, they are particularly worse off in an inflationary situation. During 2011-12, growth also slowed down, in part because of high inflation.
2) Growth: The RBI annual report makes 76 references to growth. The growth outlook for 2012-13 remains weak as combination of global and domestic macroeconomic factors that slowed down growth in the preceding year have persisted and show no signs of getting resolved. Growth during the year is likely to stay below potential for the second consecutive year. The Reserve Bank in its First Quarter Review of Monetary Policy on July 31, 2012, revised downwards its growth projection for 2012-13 to 6.5 per cent from 7.3 per cent. The downward revision mainly reflects drought impact on agricultural output and contraction in the industrial production during the quarter to June 2012.
3) Government finances: With growth remaining slow, budgetary targets are at risk. On the receipts side, shortfall in indirect tax revenue is possible if growth remains low. With decline in corporate earnings, non-tax revenues from the earnings of public sector units (PSUs) could also fall short of the target. It would be hard to meet the divestment target in current market conditions. More importantly, expenditure overshooting arising from under-provision of petroleum subsidies is likely to put fiscal position under pressure. Consequently, some level of fiscal slippage may be unavoidable.
4) India’s trade imbalance: Even though merchandise trade balance in Q1 of 2012-13 narrowed, trends in services trade in Q1 of 2012-13 are disconcerting. Preliminary estimates for Q1 of 2012-13 show services exports at US$33.4 billion, contracting 2 per cent over the year ago period. Services imports at US$20.5 billion, increased by 16 per cent. In net terms, services exports at around US$ 12.9 billion in Q1 of 2012-13 were lower by 22 per cent as compared with those in Q1 of 2011-12. This indicates that the current account deficit (excess imports over exports) CAD risks are maintained in 2012-13.
5) Monsoon: Newer uncertainties for growth in 2012-13 have emerged from the unsatisfactory progress of monsoon so far which is likely to result in a contraction in foodgrains output during 2012-13. Despite the recent revival, cumulative rainfall up to August 16, 2012 was 16 per cent deficient. The Reserve Bank’s production weighted rainfall index (PRN) showed an even higher deficit of 21 per cent. The spatial pattern of monsoon suggests that output losses could be substantial for coarse cereals and pulses, While this year the drought conditions in parts of country are marginally less severe than that during the 2009 drought, the monsoon has been unsatisfactory to a degree that has dampened the prospects for agriculture during 2012-13. During 2009-10, Rabi crop reached record levels, while the Rabi prospects this year remain uncertain and would depend crucially on September rains that will determine the soil moisture content and the reservoir levels.
6) Investment: New investments have slowed down substantially and existing investments are at risk with elongated gestations and input supply shortages affecting viabilities of projects going on-stream. Reserve Bank’s collation from banks and financial institutions show that envisaged total fixed investment by large firms in new projects which were sanctioned financial assistance during 2011- 12 dropped by 46 per cent to about Rs 2.1 trillion from Rs 3.9 trillion a year ago. This means fewer jobs would be created going forward as a result of the slowdown.
7) Power sector and coal supply: Lower coal production and supply shortages emerged as a major bottleneck in infrastructure sector. As much as 54 giga watts of new power capacity was created during 11th five year plan and another 60-75 GW of capacity may be planned during the 12th five year plan backed in part by Ultra Mega Power Projects (UMPPs). A large part of this new capacity is facing coal linkage issues. It is an anomaly that India with proven coal reserves of 114 billion tonnes has to import about 70 million tonnes of coal. A major investment initiative in India’s mining sector is necessary. Steps to attract FDI in this sector would be helpful in this context. A careful balancing of environmental and growth needs would be necessary.
8) Road sector: Road projects have slowed down due to issues in land acquisition and problems with legal, procedural and environmental clearances. More lately, availability of finance has emerged as an added constraint. Financial conditions have tightened as road construction firms are already leveraged and are unable to raise more debt in absence of fresh equity. In current market conditions these firms are unable to raise new equity. Credit to road sector shows a deceleration in Q1 of 2012-13.
9) Economic recovery: In absence of signs of global conditions improving, the burden of adjustment would have to be borne by domestic policies. Structural impediments impacting business confidence need to be addressed immediately. This is particularly true of the mining and infrastructure sectors. With limited fiscal and monetary space available to provide a direct stimulus to domestic growth, an expenditure switching policy is needed that reduces government’s revenue spending by cutting subsidies and using the resources so released to step up public capital expenditures. Such an action would also provide some space for monetary policy, but, importantly, lower interest rates alone are unlikely to jumpstart the investment cycle. Fast-tracking of infrastructure projects and pending regulatory clearances will help to boost investments. The Government has initiated some steps to augment the production potential of core sectors, in particular mining, in the recent period. However, a lot more needs to be done to boost the performance of core industries and lead revival of industrial growth.
10) Financial inclusion: India scores rather poorly on financial inclusion parameters than the global average, according to a survey. In India, only 35 per cent of people had formal accounts versus an average of 41 per cent in developing economies. India also scored poorly in respect of credit cards, outstanding mortgage, health insurance, adult origination of new loans and mobile banking. The number of no-frills accounts by banks had increased to 103 million by March 2012. However, over three-fourths of such accounts are dormant.
Here are 10 things to note:
1) Inflation: Inflation is likely to remain sticky around 7 per cent with upside risks emanating from a deficient monsoon. The most serious consequence of inflation is its adverse distributional impact on the poor, people without social security and pensioners. Poor households are unable to maintain the consumption levels at current prices and therefore, they are particularly worse off in an inflationary situation. During 2011-12, growth also slowed down, in part because of high inflation.
2) Growth: The RBI annual report makes 76 references to growth. The growth outlook for 2012-13 remains weak as combination of global and domestic macroeconomic factors that slowed down growth in the preceding year have persisted and show no signs of getting resolved. Growth during the year is likely to stay below potential for the second consecutive year. The Reserve Bank in its First Quarter Review of Monetary Policy on July 31, 2012, revised downwards its growth projection for 2012-13 to 6.5 per cent from 7.3 per cent. The downward revision mainly reflects drought impact on agricultural output and contraction in the industrial production during the quarter to June 2012.
3) Government finances: With growth remaining slow, budgetary targets are at risk. On the receipts side, shortfall in indirect tax revenue is possible if growth remains low. With decline in corporate earnings, non-tax revenues from the earnings of public sector units (PSUs) could also fall short of the target. It would be hard to meet the divestment target in current market conditions. More importantly, expenditure overshooting arising from under-provision of petroleum subsidies is likely to put fiscal position under pressure. Consequently, some level of fiscal slippage may be unavoidable.
4) India’s trade imbalance: Even though merchandise trade balance in Q1 of 2012-13 narrowed, trends in services trade in Q1 of 2012-13 are disconcerting. Preliminary estimates for Q1 of 2012-13 show services exports at US$33.4 billion, contracting 2 per cent over the year ago period. Services imports at US$20.5 billion, increased by 16 per cent. In net terms, services exports at around US$ 12.9 billion in Q1 of 2012-13 were lower by 22 per cent as compared with those in Q1 of 2011-12. This indicates that the current account deficit (excess imports over exports) CAD risks are maintained in 2012-13.
5) Monsoon: Newer uncertainties for growth in 2012-13 have emerged from the unsatisfactory progress of monsoon so far which is likely to result in a contraction in foodgrains output during 2012-13. Despite the recent revival, cumulative rainfall up to August 16, 2012 was 16 per cent deficient. The Reserve Bank’s production weighted rainfall index (PRN) showed an even higher deficit of 21 per cent. The spatial pattern of monsoon suggests that output losses could be substantial for coarse cereals and pulses, While this year the drought conditions in parts of country are marginally less severe than that during the 2009 drought, the monsoon has been unsatisfactory to a degree that has dampened the prospects for agriculture during 2012-13. During 2009-10, Rabi crop reached record levels, while the Rabi prospects this year remain uncertain and would depend crucially on September rains that will determine the soil moisture content and the reservoir levels.
6) Investment: New investments have slowed down substantially and existing investments are at risk with elongated gestations and input supply shortages affecting viabilities of projects going on-stream. Reserve Bank’s collation from banks and financial institutions show that envisaged total fixed investment by large firms in new projects which were sanctioned financial assistance during 2011- 12 dropped by 46 per cent to about Rs 2.1 trillion from Rs 3.9 trillion a year ago. This means fewer jobs would be created going forward as a result of the slowdown.
7) Power sector and coal supply: Lower coal production and supply shortages emerged as a major bottleneck in infrastructure sector. As much as 54 giga watts of new power capacity was created during 11th five year plan and another 60-75 GW of capacity may be planned during the 12th five year plan backed in part by Ultra Mega Power Projects (UMPPs). A large part of this new capacity is facing coal linkage issues. It is an anomaly that India with proven coal reserves of 114 billion tonnes has to import about 70 million tonnes of coal. A major investment initiative in India’s mining sector is necessary. Steps to attract FDI in this sector would be helpful in this context. A careful balancing of environmental and growth needs would be necessary.
8) Road sector: Road projects have slowed down due to issues in land acquisition and problems with legal, procedural and environmental clearances. More lately, availability of finance has emerged as an added constraint. Financial conditions have tightened as road construction firms are already leveraged and are unable to raise more debt in absence of fresh equity. In current market conditions these firms are unable to raise new equity. Credit to road sector shows a deceleration in Q1 of 2012-13.
9) Economic recovery: In absence of signs of global conditions improving, the burden of adjustment would have to be borne by domestic policies. Structural impediments impacting business confidence need to be addressed immediately. This is particularly true of the mining and infrastructure sectors. With limited fiscal and monetary space available to provide a direct stimulus to domestic growth, an expenditure switching policy is needed that reduces government’s revenue spending by cutting subsidies and using the resources so released to step up public capital expenditures. Such an action would also provide some space for monetary policy, but, importantly, lower interest rates alone are unlikely to jumpstart the investment cycle. Fast-tracking of infrastructure projects and pending regulatory clearances will help to boost investments. The Government has initiated some steps to augment the production potential of core sectors, in particular mining, in the recent period. However, a lot more needs to be done to boost the performance of core industries and lead revival of industrial growth.
10) Financial inclusion: India scores rather poorly on financial inclusion parameters than the global average, according to a survey. In India, only 35 per cent of people had formal accounts versus an average of 41 per cent in developing economies. India also scored poorly in respect of credit cards, outstanding mortgage, health insurance, adult origination of new loans and mobile banking. The number of no-frills accounts by banks had increased to 103 million by March 2012. However, over three-fourths of such accounts are dormant.
