Taking stock of the current economy, a latest HSBC report says that the growth inflation-mix is steadily improving, and a recovery is certainly underway.
Taking stock of the current economy, a latest HSBC report says that the growth inflation-mix is steadily improving, and a recovery is certainly underway. Comparing the steady economic growth to a tortoise as opposed to a rabbit, the report says that while the economy is improving, the momentum is likely to be gradual in some sectors, such as financial and real estate services and investment. This low growth momentum may limit overall growth potential, edging off any growth-led inflation pressures arising due to faster closing of the output gap, HSBC said.
Ahead of the RBI monetary policy committee meeting scheduled this week, HSBC notes that the growth inflation mix has certainly improved since the last meeting. However, the future seems to be fraught with uncertainties. According to the firm, after the Narendra Modi-led government announced higher MSPs on Kharif crops for farmers in Budget 2018, the move is seen to impact inflation by 30-40 bps.
“We calculate the total impact of higher MSPs on headline inflation to be in the range of 30-40 bps, mostly due to pulses, for which the prices have fallen much lower in the last one year or so. However, it is also worth noting that the government’s procurement policy for pulses may not be as effective as wheat and paddy,” HSBC said in its report.
Apart from MSPs, staggered implementation of state House Rent Allowance by the various state governments is also seen to impact inflation. Given these uncertainties, HSBC expects RBI to keep key policy rates unchanged in the upcoming MPC meeting.
Ahead of the elections next year, HSBC says that the Modi-government will focus its expenditure towards the rural economy to support rural consumption. “However, urban spending may moderate a bit given a slower growth rate in salaries, additional burden due to higher import duties, cesses and newly introduced long-term capital gains tax,” the firm noted in its report.
After considering all the factors, HSBC says that the recovery of growth is likely to be gradual, accelerating to 7% in FY19 from 6.5% in FY18. “Given its mild pace, the output gap is likely to remain negative, edging off any growth-led inflation pressure,” the firm said.