The key take-away from the Reserve Bank of India’s fourth bi-monthly monetary policy statement, released on Tuesday is the central bank’s projections on the economy’s revival, a key element on the agenda of the Modi government. The RBI did not raise its growth projection for 2014-15, retaining it at the pre-elections level of 5.5 per cent, thereby, refusing to buy into the sharp surge in business sentiment and consumer confidence that its own surveys are capturing.
Quelling all hopes of a quick turnaround of the economy, it said, the momentum of activity across the economy is yet to stabilise and that the monsoon deficiency will dampen agricultural growth, which, in turn, will spill over to the rest of the economy as lower demand for the farm sector’s produce.
Business expectations of corporates for the third quarter, surveyed by the RBI, are at a eleven-quarter high, it said in its monetary policy report, ascribing the upbeat sentiment to the formation of a stable government at the Centre and the greater certainty about the policy environment, improvement in twin deficits, buoyant foreign capital inflows, a stable exchange rate and improved financial market conditions.
The RBI’s consumer confidence survey indicates expectations for one year ahead are at their highest levels since the global financial crisis.
The RBI’s expectations, however, do not mirror this exuberance. Its stated reasons for sticking to its pre-elections growth projection are that its expectations remain ‘broadly unchanged’ for the conditions conducive to revival in investment activity,fiscal consolidation and sustained disinflation.
Stalled projects to be revivedThe key to reviving growth will be the revival of stalled projects, surmounting which, the RBI said in the monetary policy statement, has so far proved formidable as a number of factors are driving the time overruns in project implementation, including land acquisition, forest clearance and supply of raw materials. Yet another binding constraint, it said, is the energy sector outlook with uncertain regarding coal supplies. The Supreme Court last week cancelled all coal blocks allocated since 1993.
The above-expectations pick-up in the first quarter, the RBI said, was buoyed by exports growth and a turnaround in gross fixed capital formation (GFCF) or investments.
Subsequently, however, it cautions, the contraction in capital goods production in July and the sluggish imports of capital goods have raised concerns about sustainability of the investment recovery.
On the consumption side too, in spite of election-related expenditure in April and May, contribution of private final consumption expenditure (PFCE) to GDP growth declined over the fourth quarter of 2013-14.
