1. Inflation rate in India slowing, may restrain India’s robust growth record 

Inflation rate in India slowing, may restrain India’s robust growth record 

India’s economy is struggling to recover its strong growth record, beset by record low inflation, a widening output gap, and short term uncertainty from the introduction of a uniform sales tax.

By: | Published: July 4, 2017 1:31 PM
inflation, inflation rate india, inflation rate slow, india economy, india growth, narendra modi, narendra modi news Bank credit to industry contracted by 2.1 percent in May from a year earlier, in contrast to an increase of 0.9 percent in May 2016, the RBI said on Friday. (Reuters)

India’s economy is struggling to recover its strong growth record, beset by record low inflation, a widening output gap, and short term uncertainty from the introduction of a uniform sales tax. That will build pressure on the Reserve Bank of India to jettison its neutral monetary policy bias adopted just five months ago, setting the scene for lowering interest rates perhaps as early as next month, besides reminding yield-chasing investors that putting money in India is not without risks.

Any reduction in interest rates will be in contrast to what major central banks are trying to signal — a rise in borrowing costs– and could trip the Indian rupee which hit a 20-month high in April. This would be bad news for a country that needs to attract billions of dollars in foreign investments to make up a shortfall in domestic capital.

Having already ceded the crown of the fastest growing major economy to China in the January-March quarter, India is “significantly under-performing compared to its potential now for quite some time,” according to Ravindra Dholakia, a member of India’s rate-setting committee and an economist at the country’s premier management institution. An arch-dove on the six-member panel, Dholakia voted for a 50 basis points cut at last month’s meeting.

Part of the reason is a self-inflicted goal in the form of a cash ban from which India is still recovering. And the combination of over-leveraged companies and banks struggling with the problem of bad loans means businesses are not borrowing to invest and banks are not lending much in Asia’s third-largest economy.

“The big problem is revival of investment and that is being held back because of the twin-balance sheet problem,” Vijay R Joshi, Emeritus Fellow of Merton College at University of Oxford and the author of the book ‘India’s Long Road — The Search for Prosperity’, said over the phone. He added it would take a long time for capital spending to recover as India goes about repairing the health of its banking system.

Bank credit to industry contracted by 2.1 percent in May from a year earlier, in contrast to an increase of 0.9 percent in May 2016, the RBI said on Friday. Demand for loans from sectors like infrastructure, food processing, basic metal, metal products and textiles all contracted.

In the January-March quarter, India grew at 6.1 percent from a year ago, well below the average seen in the past five years when it expanded at 6.9 percent. While that is still a robust rate in the western world, it is not good enough to help it provide employment to the millions joining the workforce every year. It doesn’t bode well for Prime Minister Narendra Modi’s government which is aware the economy needs to grow at double digits to generate jobs and keep social tensions at bay.

Inflation Softens

The $2 trillion economy will expand 7.3 percent in fiscal year 2018, according to the June survey conducted by Bloomberg News. Growth forecasts were lowered slightly for this year and next year when compared to a survey conducted in May. Amid slowing growth and a drop in food prices, economists also lowered their consumer price inflation forecasts for the 2018 and 2019 fiscal years to 4 percent and 4.75 percent, respectively, from 4.5 percent and 5 percent in May’s survey.

Meanwhile, the latest purchasing managers’ index for the manufacturing sector released on Monday showed growth slowing in June to 50.9 from 51.6 in May.

“India’s current growth rate is below potential,” said Kaushik Das, chief India economist at Deutsche Bank. “Growth is mainly supported by private consumption at this juncture with private investment remaining anemic due to the high leverage of the corporate sector and weak demand. In other words, the quality of growth is not optimal at this stage.”

Policy makers are, of course, optimistic this won’t last long. They predict reforms like the goods and services tax, opening various sectors to foreign direct investments and scrapping a bureaucratic board that oversaw these flows will make it easier to do business in India.

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“India’s potential growth is rising, not falling. That is the conclusion to be drawn from a raft of structural reforms unleashing the economy’s productive power,” said Abhishek Gupta, economist at Bloomberg Intelligence.

“At the same time, actual growth is lagging due to demonetization and high real interest rates. The upshot — a widening output gap that is pulling down inflation,” Gupta said. “That point may be lost on the central bank, which shifted to neutral from accommodation this year. The Reserve Bank of India needs to cut rates to let growth catch up to the economy’s potential.”

Supply Chains

The introduction of GST is likely to have a marginal impact on inflation. Some economists say price pressures may have eased further in June as businesses offered hefty discounts before the tax was implemented from July 1.

In the first quarter of the fiscal year, “growth will be depressed due to GST-related inventory draw down,” Ashutosh Datar, an economist with IIFL Institutional Equities, wrote in a June 23 report.

If supply chains are normalized by September, “growth is likely to see a sharp uptick due to the post-GST inventory restocking.”

  1. R
    RapistAndFalse ProphetMuhammed
    Jul 4, 2017 at 2:07 pm
    This Jaitley is talking BullS T.... These people when in power by default think India is shining . They will not even bother to really check the facts and talk . not sure from where Jaitley gets his information that all is well . Of course if you ask the Banks and the corporations how is the govt doing they will say very good because the Banks and corporation never go in losses which ever govt is in power . So if these s ask the common man directly they will get the right feedback how India is really doing and not be over smart and tell that all is well . There is a lot of work to be done and the answer should be till now nothing has been done by the BJPig government .
    Reply

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