Two policy statements, common messages

Two important policy statements — the mid-year economic analysis of the economy and the Reserve Bank of India’s mid-quarter monetary policy review — were unveiled in quick succession two weeks ago. The mid-year analysis or review laid before Parliament on December 17 is a scorecard on the economy submitted by the finance ministry. It is largely the work of the new Chief Economic Advisor, Raghuram Rajan.

As a policy statement, it is a sequel to the Economic Survey that is presented to Parliament days before the Union Budget and, hence, should command the same degree of importance. However, just as the Union Budget eclipses, as it were, the Economic Survey, the recent mid-term review has not merited the attention it deserves, upstaged as it seems to have been by the RBI’s policy statement of the next day (December 18).

That is unfortunate because both the reports, inevitably, cover common ground. Macro-economic issues such as those relating to inflation, fiscal and current account deficits and expectations of gross domestic product (GDP) growth form the subject matter of both the reports. Corroborating the views of one with those of the other gives the analyst a complete picture of the economy.

Especially in a situation where the Finance Minister and the RBI are reportedly having significant differences over matters such as the direction of monetary policy: should RBI yield to the government’s subtle and not so subtle pressures and start cutting interest rates?

To its credit the mid-year review has effectively broken the mould of exaggerated economic growth forecasts that have been a characteristic feature of most official pronouncements so far.

Introducing a touch of realism in the economic discourse was long overdue. In estimating GDP growth for the current year (2012-13) at between 5.7 per cent and 5.9 per cent, it acknowledges the slowdown in uncertain terms. The budget had projected a growth rate of 7.6 per cent. So the latest projection is a good 2 percentage points lower. To be fair, Finance Minister P. Chidambram has recently talked of a lower growth rate but officially the government had not revised its forecast even in the face of mounting evidence of a slowdown.

All others, including the RBI, had brought it down. The RBI’s current forecast is of a 5.8 per cent growth down from its earlier 6.5 per cent.

Even the revised estimate of growth of between 5.7 per cent and 5.9 per cent is based on certain assumptions. During the first-half of this year (April-September), economic growth was of the order of 5.4 per cent. That means the economy has to grow by at least 6 per cent during the next six months. Whether that is going to be possible or not depends upon a variety of circumstances, which both the government and the RBI have spelt out in detail.

Of special relevance to the monetary policy are the twin deficits — the fiscal deficit and the current account deficit — and inflation. Both the reports agree on the main points relating to inflation.

WPI-based inflation

There was some good news at last — the wholesale price index (WPI)-based inflation slowed to a 10 month low of 7.24 per cent in November from 7.45 per cent in the previous month. Very significantly, core inflation, a measure that excludes food and fuel inflation, touched a 32 month low of 4.5 per cent in November. This measure, closely watched by the RBI, is, however, known to be volatile. Food inflation was, however, sharply up in November.

On balance, both the government and the RBI reports expect inflation to moderate further in the last quarter of fiscal 2013 (January-March 2013). Based on this, the RBI has hinted at an easing of monetary stance from the beginning of next year.

The levels of fiscal deficit have remained contentious. In the mid-year review, the government has stuck to the target of 5.3 per cent of the GDP, while admitting that it will be tough to be a tough call. There has been a slippage in corporate tax, excise and customs duty and service tax. The realisations from both the disinvestment and the 2G spectrum auctions are likely to fall below expectations.

While the RBI has not gone into the details, it has always advocated greater alacrity on fiscal consolidation as an essential prelude to easing of interest rates.

Both the reports cite the importance of global economy on decision making in India.

Adverse economic conditions in the developed world have led to a fall in India’s exports. Consequently, the trade deficit and with it the current account deficit has widened.

It is going to be a challenge to keep the CAD within acceptable limits.

In sum, both the reports are mildly optimistic of an economic revival from the beginning of calendar year 2013. Quite refreshingly, the government and the RBI seem to agree on the building blocks necessary for such a revival.

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