By most accounts, it’s now time for officialdom to press the panic button on the economic front. With the GDP growth rate for the fourth quarter of the financial year ending March 2012 coming in at a disastrous nine-year low of 5.3 percent – well below expectations of around 6.1 percent – it’s clear that both the government and the Reserve Bank of India (RBI) will need to act decisively if the economy is to be brought back on the rails. The growth rate for the financial year ending March 2012 has been put at 6.5 percent.
While cutting rates by a deeper than expected 50 basis points in its April policy, RBI governor Duvvuri Subbarao had said the scope for further cuts could be limited given that the economy was moving closer to the ‘trend’ or non-inflationary rate of growth – of 7.5 percent – and RBI’s own estimates put growth for the financial year ending March 2013 at around 7.3 percent.
While announcing the rate cut in April, Subbarao had said: “The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates.”
However, with the latest growth figures of below the psychologically important 6 percent mark, RBI will doubtless have to go back to the drawing board ahead of its June 18 policy review. Economists reckon that with this inordinate slowing down of the growth rate, core inflation would also be coming down, and it was therefore necessary for the central bank to rework its growth-inflation priorities and place growth above inflation in its list of concerns.
Calculations go awry
“Looking ahead, based on an assessment of the domestic demand-supply balance, global trends in commodity prices and the likely demand scenario, the Reserve Bank’s projection of inflation for March 2013 is 6.5 per cent,” RBI’s April policy said.
In fact, after the inflation figure for April came in at 7.23 percent, higher than expected, Citi’s Rohini Malkani had pointed out that despite this, since core inflation was relatively benign, the situation would be further complicated for policy action.
Economic growth decelerated last year, dropping from 7.7 per cent in the first quarter to 6.9 per cent in the second quarter and further down to 6.1 per cent in the third quarter. This was mainly due to deceleration in industrial growth. Growth in the services sector held up relatively well. On the demand side, gross fixed capital formation contracted both in the second and third quarters of last year, the central bank had pointed out.
“Looking ahead, the overall growth outlook for the current year looks a little better than it was last year. Accordingly, the Reserve Bank’s baseline projection of GDP growth for the current year is 7.3 per cent,” the Governor had said last month.
However, the latest figures throw all calculations off gear. Reuters reports that the 5.3 percent figure is the lowest since the January-March quarter of 2003. The full fiscal’s figures at 6.5 percent are also the lowest since 4 percent of 2002-2003, and sharply lower than last fiscal’s 8.5 percent.
"The data highlights the unusual degree of weakening of the country's economy, likely driven by poor investment and widening trade gap," Reuters quotes Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong as saying.
While Subbarao and his colleagues at Mint Road will now have to rework the math, with global oil prices easing off, some of the worries on the oil front may be easing enough for RBI when it weighs further rate cuts going forward.
But the latest figures point to the fact that the time to act for policymakers is now. Growth is now a much bigger concern than inflation, and the Reserve Bank will now be called upon to use all the tools at its disposal to provide a boost to a seriously floundering economy.
Spotlight on Subbarao
C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, says interests rates could ease, and not rise further and that will provide a boost to growth going forward. By his reckoning, 6.5-7 percent is the growth rate India could end up with in the current financial year.
“The stance can be towards growth, but certainly any policy action will depend upon how inflation behaves. I don’t think that the monetary authority will be comfortable in moving towards easing of the policy further, unless the inflation situation also moves down, and the inflationary tendency are seen to be coming down. Otherwise, it becomes very difficult for the monetary authority to adopt a stance of easing. I still think that while growth is important and growth needs to be stimulated and monetary policy can have a role there, you cannot ignore what is happening to the inflationary situation,” Rangarajan told CNBC-TV18 after the growth figures came in.
The spotlight, once again, will be on Subbarao and RBI. How the RBI governor assesses the situation and whether he reworks his growth-inflation priorities will hold the key in the coming days. A growth figure which is the lowest in nine years surely deserves attention.