The RBI annual report has become a routine affair and does not really evoke much enthusiasm because the RBI is speaking officially every two months on the state of the economy at the time of the credit policy. Also the RBI is vocal with its views at different seminars with the speeches being well documented on the web site. Therefore, the annual report has become a routine document that has to be tabled.
With this being the last one to be presented by Raghuram Rajan, there was expectation that there could be a surprise, and this is where there is a refreshing twist in the assessment of the prospects for the Indian economy this year. Raghuram Rajan has been cautious in his evaluation of the economy while the government has tended to be more optimistic. This is but natural as the RBI is a neutral party while governments are political as they have to appeal to the masses and inspire confidence. Hence, the RBI’s less enthusiastic tone of gross value added increasing by 7.6% this year is less sanguine than the government which is speaking of 8% plus growth this year. While the difference is not much, the 8% mark is psychological as it puts the economy in a different league.
While there was the concept of a Governor’s overview in the 2015 report, this one has a Foreword, which makes it different, as it is a break from the past. Raghuram Rajan has always been asking us to temper down our enthusiasm and continue working as while the economic numbers look good, there is not much momentum in the economy. This is what he has put forward quite succinctly in the annual report which is also the true picture.
First, the RBI is quite direct in saying that industrial growth has stagnated and more importantly will not pick up any time soon. Some push will be seen post monsoon and harvest time, but the general buoyancy witnessed 3 years back will not return this year. The RBI actually says that there are no strong discernible drivers of the economy for the year.
Second, the RBI has stated that investment will not be increasing significantly in FY17 and the downbeat conditions today will continue for some more time. The main reason is that private investment has not picked up and government expenditure has been slow and not fast enough to pull the triggers. This is significant as it means that we should be careful while interpreting the optimism which has gone overboard at times when interpreting government investments in roads and railways.
Third, and more critically on inflation, the RBI is firm with the view that as long as it is high, there is less room for lowering interest rates. And interestingly in the Foreword, the Governor has spoken of also ensuring that the deposit holders get a fair return which is not possible when inflation is high. Hence the RBI has made further rate cuts conditional on the inflation rate moving down, which it admits is possible with the monsoon being good this year after two sub-normal years.
Fourth, another issue which we like talking of is exports. This has led to discussion on whether or not the RBI wants the rupee to depreciate or appreciate and at times critics have lobbied for letting the rupee fall to boost exports. The RBI’s view here is that the global economy is not doing well and does not show signs of a major recovery in which case exports would continue to show negative growth and hence will not be able to propel industrial growth. Uncertainty on the Brexit fall out and protectionist policies being pursued by some countries would come in the way of our exports growth.
The RBI is very positive of other aspects of the economy. First, the higher agriculture growth this year coupled with the Pay Commission recommendations will provide a boost to consumption, which is important for the growth process to be sustained. Hence, consumption led growth is what we are banking on.
Second, the government has a role to play in terms of spending, and if it goes according to what was budgeted, the public administration component of the GDP should show traction and support growth of 7.6%.
Third, the policy framework of getting in more FDI and better business environment can be seen as strong foundations being laid for the future and hence will show perceptible results in the coming years.
Fourth, the RBI is confident of the fiscal action being taken to keep the deficits under control which is significant because at times the RBI has been commenting on the fiscal deficit increasing. This quite clearly puts its case in the positive zone. But it does add that in case states have not buffered in their costs on this score as they normally tend to move with what is done at the centre, then there would be some deviations.
Fifth, the RBI has allayed fears of the GST being inflationary as a large part of the basket in CPI is not affected by the same.
On the whole the RBI has brought out a very pragmatic report on the state of the economy and told us clearly what to expect and not expect. While reforms in the area of FDI, power sector, GST etc. have put us on the right track, effort must be on to usher in others like land, labour and single agriculture market. This also means that any major change in the economy may be expected only from FY18 onwards. That in essence is the message sent out.