RBI sees growth ac­cel­er­at­ing this fis­cal on con­sumer, govt spend­ing


Cen­tral bank fore­casts GVA to grow 7.3% in 2017-18, flags banking stress, cor­po­rate lever­age as risks

The Re­serve Bank of In­dia (RBI) said that favourable do­mes­tic fac­tors such as a pick-up in dis­cre­tionary con­sumer spend­ing and ro­bust gov­ern­ment spend­ing will quicken eco­nomic growth in the cur­rent fis­cal year. The cen­tral bank’s an­nual re­port re­it­er­ated its fore­cast for gross value added (GVA, a mea­sure of eco­nomic out­put) to grow at 7.3% in 2017-18, as against 6.3% in 2016-17.

How­ever, at the same time, the re­port flagged risks such as over-lever­aged cor­po­rate sec­tor and stressed banking sec­tor, be­cause they could de­lay pri­vate in­vest­ment de­mand re­vival. It also noted that farm loan waivers could add to up­ward pres­sures on in­fla­tion.

The cen­tral bank has pro­jected con­sumer price in­dex (Cpi)-based in­fla­tion at 2.0-3.5% in the first half of fis­cal 2018 and 3.5-4.5% in the sec­ond half.

RBI said the an­nounce­ments of farm loan waivers and the im­ple­men­ta­tion of hous­ing rent al­lowance rec­om­men­da­tions of the Sev­enth Pay Com­mis­sion by states could lead to fis­cal slip­pages, and this poses an up­side risk to the fu­ture tra­jec­tory of head­line in­fla­tion.

Farm loan waivers are a ma­jor fis­cal risk over the medium term, im­pact­ing credit dis­ci­pline and vi­ti­at­ing credit cul­ture, the re­port noted. As per ini­tial es­ti­mates, the to­tal loan waivers an­nounced dur­ing 2017-18 till 2 Au­gust, amount to 0.4% of gross do­mes­tic prod­uct (GDP), it added.

In­ter­est­ingly, the mid-year Eco­nomic Sur­vey pre­pared by the fi­nance min­istry had flagged farm loan waivers too.

The RBI re­port said that the cen­tral bank ex­pected an in­crease in over­all food in­fla­tion as un­favourable base ef­fects set in from Au­gust 2017 even though in­fla­tion in pulses is seen to be muted. How­ever, it added that with the likely progress of the south-west mon­soon, food prices may re­main mod­er­ate over the sub­se­quent months as long as the sea­sonal price pres­sures of se­lect veg­eta­bles such as toma­toes dis­si­pate.

In the fis­cal first quar­ter, CPI was around 2.2%. How­ever, it rose to 2.36% in July, re­duc­ing the prob­a­bil­ity of any near-term in­ter­est rate cut, ac­cord­ing to economists.

The RBI’S mon­e­tary pol­icy com­mit­tee, which cut repo rate by 0.25 per­cent­age points on 2 Au­gust, is man­dated to keep CPI at 4%, the mid-point of a 2-6% tar­get range.

“We ex­pect the av­er­age in­fla­tion num­ber for the cur­rent fis­cal year to be around 4% with a down­ward bias. The im­pact of farm loan waiver will be felt over a pe­riod of 3-4 years and is not im­me­di­ate. More­over, not all states have waived the farm loans,” said D.K. Joshi, chief econ­o­mist at Crisil Ltd.

“Glob­ally sub­dued food prices and good mon­soon do­mes­ti­cally will keep a check on food in­fla­tion. Oil prices that were an­tic­i­pated to move up sig­nif­i­cantly have not shown any such trend,” he added.

On the health of the banking sec­tor, the re­port said that RBI will con­tinue to mon­i­tor and re­spond to as­set qual­ity issues.

It added that ini­ti­at­ing the in­sol­vency process is ex­pected to sig­nif­i­cantly im­prove the res­o­lu­tion of stressed as­sets, par­tic­u­larly where many banks are in­volved.

Fol­low­ing RBI’S di­rec­tion, banks have ini­ti­ated pro­ceed­ings un­der the In­sol­vency and Bank­ruptcy Code against 12 large bor­row­ers, of which 11 cases have been ad­mit­ted so far by the Na­tional Com­pany Law Tri­bunal. The cen­tral bank has sent a sec­ond list of de­fault­ers, di­rect­ing banks to fi­nal­ize a res­o­lu­tion be­fore 13 De­cem­ber, fail­ing which these bor­row­ers will also be pro­ceeded against for in­sol­vency.

Apart from as­set qual­ity, im­ple­men­ta­tion of In­dian Ac­count­ing Stan­dard and the Basel III frame­work will re­main the ar­eas of fo­cus in the cur­rent fi­nan­cial year, RBI said.

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