Figuring it out
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The document summarizes recent downward revisions to India's economic growth forecasts for 2011-2012. It notes that inflation has been higher than expected, putting the RBI's growth forecast at 8%, down from the government's earlier estimate of 9%. While the economy may reach the upper end of the RBI's 7.4-8.5% range, the document argues growth above 8% is still more likely than below 8%. Global factors like commodity and oil prices are influencing inflation, and prices may reduce over the year. The document calls for the government to address real constraints on growth like delays in mining projects rather than just accepting lower growth to reduce inflation.
Figuring it out
- 1. N D I CU S www. in d i c u s . n et Figuring it out Lower Forecasts Fail to Beat Hope Earlier target of 9% growth is now out of reach Indicus Analytics Published: Economic Times 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 finance minister 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, our earlier 9% estimate is clearly out of reach. Yet we believe that the below 8% scenario is still less probable than an above 8% growth. It is true that much will depend on how the risks materialise and how steep the rates will rise over the year. 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.
- 2. N D I CU S www. in d i c u s . n et 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. On an average though, 2011-12 will see prices higher than the previous years, the question is by how much and whether this rise will be allowed to pass through or will the fiscal absorb it? The former would be the most rational solution; it is for the government to ensure that the fiscal rollback is maintained. The uncertainty is not restricted to just crude. Take food prices -- the FAO World Food Price Index fell for the first time in nine months in March, with the prices of oils and sugar contributing the most to the fall in the overall index. 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. In India rabi crop sowing has been higher than the previous year by 10% and with a good monsoon, pressure on prices can lighten significantly. Since two good years of rains have a significant impact on consumer sales, given a good monsoon this year, not only will this have a positive impact on food prices, it will also give a boost to consumption in rural and small town India. In painting a dire picture ahead, thereby accepting lower growth as a trade-off in the fight against inflation, the government is still shying from addressing the key issues. Reduce growth and inflation comes down, true but what kind of signal is this giving to producers and consumers? More importantly, is there an alternative? We believe that there is an urgent need for the government to take a look at where the real danger signs are and address 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 constraints should be top priority now. Moving into the ‘8% is the normal’ outlook, and denting confidence is ensuring that the Indian economy continues to perform below potential. Indicus Analytics Contact Sumita Kale (sumita@indicus.net) for comments.