All across the board growth forecasts for this year are being
revised downwards. What has changed in the last few months? Higher than
expected inflation in the economy and the underlying pressures coming in from
commodity and crude oil prices. The RBI has now given a dark forecast for
2011-12, with growth at 8%, a whole percentage point lower than the government
budget estimate, and inflation at elevated 9% levels in the first half of the
year. There is a clear flip in the stance of the RBI, emphasising the need to
accept lower growth in the short term in an effort to tame stubborn inflation
and the FM seems to be going along with this new framework accepting this as
bitter medicine. The question now is will the upper end of the range 7.4-8.5%
play out or will the economy slide down to the lower end? We have always been
amongst the most optimistic when it comes to growth in India, but given that
policy makers are in sync now with the need to lower growth, admittedly our
earlier 9% estimate looks to be more difficult. Yet we believe that the below
8% scenario is still less probable than an above 8% growth.
But food inflation will come down in a few months and petro prices
are already at the top end of the curve. The interest rate hike may impact it
further but will definitely impact growth more. What is even more worrisome for
India's long term is fall in growth of infrastructure projects, many of which
are very sensitive to long term interest rates.
It is true that much will depend on how the risks materialise and
how steep the rates will rise over the year. And also whether interest rates
will be quickly revised downward when the good news comes in post monsoon. Yet
keep in mind that global factors are playing an important role in the current
inflation- commodity prices and most importantly, crude oil being the key,
these can be quite volatile. The Short term Energy Outlook issued last month by
the US Energy Information Administration admits that energy price forecasts are
highly uncertain, yet places a higher probability on prices reducing below $100
by December than rising over $120.
Food prices have steadied globally in March and April, off the peak
of February, according to the FAO World Food Price Index which fell for the
first time in nine months in March. There will be greater volatility this year
given the low global inventories, and the picture will be clear in another few
months, with the main stress points in oils. Yet in India rabi crop sowing has
been higher than the previous year by 10%, giving a record food grain output
for the whole year, and with a good monsoon, pressure on prices should lighten
In painting a dire picture ahead, thereby accepting lower growth as
a trade-off in the fight against inflation, the government plus RBI is still
shying from addressing the key issues. We believe that there is an alternative,
it lies with the government looking at where the real danger signs are and
addressing those. These are all well known, and last month we had pointed to
some, for instance, the need to kick-start delayed mining projects. Recently
Coal India admitted that it is being constrained in production planning, thanks
to the policy confusion; in effect production targets for the 12th Plan will
not be as high as they could be.
Double-digit growth and inflation in the 4-5% range is actually
achievable, but fixing such structural constraints has to be the top priority.
Moving into the ?8% is the normal? outlook, and denting confidence is ensuring
that the Indian economy continues to perform below potential.
P.S. Indicus is pleased to announce the launch of its Centre for Financial Inclusion, with support from the
Bill and Melinda Gates Foundation.