The dampened investment climate may revive gradually following the demonstrated intent for fiscal
policy reforms and commitment to much-awaited active policy to propel the economy forward.
This will help improve business sentiments which remained cautious driven by uncertainties
in the global and domestic economies. External agencies and professional forecasters have
significantly revised their growth projections for India downwards. If the announced domestic
reform measures are well-implemented and complemented by further reforms, the economy
would turn around, despite the current expectations and sluggish global growth. In the interim,
cautious calibration is needed so that macroeconomic risks are contained.
Recent actions by the government reduce
macroeconomic risks, but implementation
is important
VII.1 Domestic growth has averaged 5.4 per
cent over the previous two quarters. This is
lower than the 6.5 per cent in 2011-12 and the
crisis-affected growth of 6.7 per cent in 2008-09. With an amalgamation of weaker economic
indicators including falling savings and
investment, rising twin deficits and inflation,
potential growth also dropped by one percentage
point in a little over a year.
VII.2 Part of the slowdown was due to weak
global growth amidst debt and financial crises
that has slowed down growth and trade across
geographies. However, domestic factors have
magnified the growth slowdown in India. High
and persistent inflation which necessitated
monetary policy action to contain inflation and
anchor inflation expectations, partly contributed
to this. Monetary tightening was needed to
consolidate macroeconomic stability and foster
growth in the medium run. But, beyond this,
inadequate movement on the policy and
implementation fronts worsened the investment
climate that had already suffered due to global
uncertainties and the cyclical downturn in the
Indian economy.
VII.3 The slew of policy measures announced
by the government, since mid-September 2012,
have started addressing these concerns (Table VII.1). These reforms measures by themselves
are not sufficient to address the macro and
structural problems constraining growth and
delivering the needed reduction in twin deficits.
Yet, they mark a significant directional change.
Speedy implementation of the proposed
measures and further progress to contain twin
deficits would be needed for sustainable
recovery to set in.
Economic downturn is getting arrested
VII.4 By reducing the macro-financial risks,
the reforms should help arrest falling growth.
Although, growth in Q2 of 2012-13 is unlikely
to be significantly different, gradual recovery
could follow later in the year.
VII.5 Growth in 2012-13 has slowed more
than anticipated due to multiple factors. The
kharif crop has been adversely impacted
following deficient monsoon. Good rainfall in
August and September has improved the soil
moisture content and reservoir levels, thus
raising the prospects for a good rabi crop.
However, agriculture is likely to pull the overall
growth down as kharif crop shortfall may not
be entirely recovered.
VII.6 Contraction in mining sector continues
following a clamp-down on illegal mining
activity. Manufacturing output has stagnated as
external demand as well as domestic investment
and private final consumption expenditure have
decelerated. Services sector growth has also
slowed as activity in trade, transport, hotels and communication has been impacted given its
linkages with the rest of the economy.
VII.7 While a modest recovery can be
expected later in the year as the investment
climate improves, growth in 2012-13 will fall
short of the earlier projection.
Table VII.1: Key Reform Measures Since Mid-September 2012 |
Date of
announcement |
Reform measure and key features |
Expected outcome |
Whether approval
pending |
1 |
2 |
3 |
4 |
Sep. 13, 2012 |
Fuel price hike:
|
Would reduce under-recoveries on sale of diesel by about
`150 billion in 2012-13, making a small but significant contribution to fiscal consolidation.
Would also lower suppressed inflation in the system, bringing medium-term benefits, even though inflation may
rise in the near term. |
No |
Sep. 14, 2012 |
FDI liberalisation
-
Up to 51% FDI in multi-brand and single brand retail subject to conditions
-
Up to 74% FDI in teleports, mobile TV and sky-broadcasting services.
-
Up to 49% FDI in aviation by foreign airlines.
|
Moderate FDI inflows likely over next 1–3 years in retail.
This will improve organised retail penetration, but its market share may still remain less than 10 per cent. Supply-chain management over the years should improve, helping to lower prices and improve consumer welfare. MSMEs would also benefit. Both exports and imports could rise.
FDI in aviation would depend on restructuring and M&A.
FDI in broadcasting may support digitisation through the
cable and Direct-to-Home (DTH) segments over time. |
No |
Sep. 14, 2012 |
Disinvestment in PSUs
Oil India Limited (10%), MMTC (9.33%), NALCO (12.15%) & Hindustan Copper (9.59%) |
Raise `150 billion out of `300 billion budgeted for
disinvestment in the Union Budget 2012-13. Also improve efficiency and market discipline and bring in greater shareholder accountability and better corporate governance in these PSUs. |
No |
Sep. 21, 2012 |
Reduction in withholding tax
Reduced tax on overseas borrowings by
domestic companies during July 2012–June 2015 to 5 % from 20%, Subject to conditions |
Reduced cost for corporate borrowing abroad. This may
increase debt inflows in the capital account. |
No |
Sep. 24, 2012 |
Financial restructuring of state distribution
companies (Discoms) |
Accumulated losses of discoms are estimated at `1.9
trillion as at the end of 2010-11. The restructuring package
may face several difficulties in implementation, but it is a
significant step towards containing the financial problems
in the power sector. |
No |
Sep. 29, 2012 |
Proposal for National Investment Board
(NIB) headed by the PM to clear infrastructure
projects above a certain threshold. |
Faster clearances of infrastructure investment would
provide greater clarity and reduce uncertainty. It would
also avoid delays in the implementation of projects. |
Cabinet approval
pending |
Oct. 1, 2012 |
Package for insurance sector |
Would help in capital infusion in insurance sector and also
encourage domestic savings. |
IRDA, CBDT and
CEBC notifications
pending |
Oct. 4, 2012 |
Further FDI liberalisation (in insurance &
pension)
Foreign investment ceiling in the pension sector at 26% or such percentage as may be
approved for the insurance sector, whichever
is higher. |
Would help tap a large pool of global savings to improve
long-term growth in India. Such FDI would bring more
stable capital inflows and bring about greater exchange rate stability. |
Parliamentary
approval necessary |
Oct. 4, 2012 |
Twelfth Five-Year Plan
Approved by cabinet for placing it before the
National Development Council (NDC) |
Would set the growth agenda for the next five years with
plans covering large infrastructure investments. |
NDC approval
pending |
Oct. 5, 2012 |
Pushing economic legislations: CCEA
approval of amendments to the Companies
Bill, 2011, the Forward Contracts
(Regulation) Amendment Bill, 2010 and the
Competition Act, 2002. |
Diverse benefits from an improved legal framework |
Parliamentary
approval necessary |
Inflation risks persist, warranting cautious
policy calibration
VII.8 Notwithstanding the growth deceleration, inflation remains significantly
above comfort levels. This partly reflects the
impact of past suppressed inflation that is now
being reflected in current inflation numbers as
administered prices are adjusted upwards. This
has kept core inflation elevated in relation to the
falling growth as cost-push pressures are getting
reflected in prices. In addition, some latent
demand-side pressures still persist, as there have
been large wage inflation pressures in the
economy in recent years.
VII.9 Despite the recent moderation in the
price of crude oil, liquidity impact of QE and
geopolitical uncertainties constitute upward
risks to commodity prices. On the domestic
front, the reform measures-induced hike in
administered prices would cause inflation to rise
in the near-term but ease fiscal pressures in the
medium-term, which will help soften inflation.
Supply-side rigidities and less competitive
market structures continue to put pressure on
prices. For several commodities, the input cost
pressures are significant. As a result inflation
has now persisted for the third year, inspite of
negative output gap, supported by the wage-price
spiral that poses significant risk to
medium-term inflation. In the short-run inflation
may turn out to be slightly higher than
anticipated. However, it is likely to soften from
Q4 of 2012-13.
Business sentiments are weak, but recent
policy actions may improve confidence
VII.10 Various business confidence surveys
portray weak sentiment about business prospects in Q1 and Q2 of 2012-13. NCAER’s Business Confidence Index shows a declined in overall
confidence over Q1 of 2012-13, but no change
over a year. FICCI’s business confidence survey,
likewise, reveals a fall in the overall business
confidence index in Q1 of 2012-13. According
to FICCI, weak demand, high cost of credit and
worsening employment prospects emerged as
constraints. The CII Business Confidence Index
fell during Q2 of 2012-13, reflecting low
business sentiments. Stagnation in reforms and
credit availability constraint emerged as
important (Table VII.2).
VII.11 Most of the responses for these surveys
were received before the announcement of the
reform measures. Those received later indicate
improved business sentiments. The Dun &
Bradstreet Business Optimism Index for Q3 of
2012-13 shows an improvement over the
previous quarter, reflecting the improved
sentiments.
VII.12 The seasonally adjusted HSBC Markit
Purchasing Managers’ Index for manufacturing
remained flat during September 2012, while that
for services recorded the fastest expansion in
business activity in the past seven months.
However, input prices continue to rise in both
sectors, while business expectations fell to a
six-month low in the services sector.
Table VII.2: Business Expectations Surveys |
Period Index |
NCAER-
Business
Confi-
dence
Index
Oct 2012 |
FICCI
Overall
Business
Confi-
dence
Index
Q1:2012-
13 |
Dun &
Brad-
street
Business
Opti-
mism
Index
Q4: 2012 |
CII Busi-
ness
Confi-
dence
Index
Q2:
2012-13 |
1 |
2 |
3 |
4 |
5 |
Current level of the Index |
125.4 |
51.8 |
140.8 |
51.3 |
Index as per previous survey |
126.6 |
60.3 |
136.1 |
55.0 |
Index levels one year back |
125.4 |
51.6 |
143.7 |
53.6 |
% change (q-o-q) sequential |
–0.9 |
–14.1 |
3.5 |
–6.7 |
% change (y-o-y) |
0.0 |
0.4 |
–2.0 |
–4.3 |
But there is a shift, however small, to a
better outlook
VII.13 The Reserve Bank’s 59th round of the
Industrial Outlook Survey (http://www.rbi.org.in/IOS59) conducted during Q2 of 2012-13
showed further weakening in the business
sentiments of the manufacturing sector during
the quarter.
VII.14 The Business Expectation Index (BEI),
a composite indicator based on several business
parameters, declined to levels seen at the onset
of the financial crisis in Q3 of 2008-09.
However, the survey also revealed that the
outlook for the ensuing Q3 of 2012-13 had
improved marginally (Chart VII.1).
VII.15 Demand conditions, as reflected in the
net responses for production, order books,
capacity utilisation, exports and imports,
appear to have further weakened in Q2.
However, the outlook for Q3 showed marginal
improvement, except for exports and imports
(Table VII.3).
Table VII.3: Reserve Bank’s Industrial Outlook Survey |
Parameter |
Optimistic
Response |
Net Response |
2011-12 |
2012-13 |
Oct-Dec |
Jan-Mar |
Apr-Jun |
Jul-Sep |
Oct-Dec |
E |
A |
E |
A |
E |
A |
E |
A |
E |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
1. |
Overall Business Situation |
Better |
35.2 |
17.7 |
33.6 |
26.5 |
34.9 |
18.3 |
30.6 |
16.1 |
32.2 |
2. |
Overall Financial Situation |
Better |
26.3 |
11.2 |
25.2 |
18.5 |
27.7 |
14.2 |
23.6 |
12.2 |
25.8 |
3. |
Production |
Increase |
39.9 |
25.3 |
40.4 |
33.1 |
34.7 |
20.3 |
33.6 |
18.8 |
35.7 |
4. |
Order Books |
Increase |
33.4 |
18.4 |
31.3 |
24.8 |
29.5 |
16.9 |
29.9 |
12.0 |
30.3 |
5. |
Capacity Utilisation |
Increase |
22.2 |
10.8 |
24.3 |
16.7 |
19.9 |
8.6 |
18.4 |
6.3 |
20.0 |
6. |
Exports |
Increase |
22.1 |
11.5 |
18.6 |
14.2 |
20.7 |
10.8 |
20.5 |
10.0 |
18.0 |
7. |
Imports |
Increase |
16.9 |
11.6 |
15.5 |
14.4 |
15.7 |
11.6 |
15.5 |
9.8 |
14.0 |
8. |
Employment in the Company |
Increase |
16.5 |
11.3 |
13.6 |
12.9 |
14.6 |
10.0 |
12.3 |
8.3 |
13.3 |
9. |
Availability of Finance |
Improve |
20.2 |
10.4 |
19.0 |
15.8 |
22.9 |
15.0 |
20.4 |
13.8 |
21.3 |
10. |
Cost of External Finance |
Decrease |
–41.0 |
–50.6 |
–38.8 |
–37.4 |
–22.7 |
–30.5 |
–24.0 |
–27.4 |
–20.6 |
11. |
Cost of Raw Material |
Decrease |
–49.7 |
–61.2 |
–50.1 |
–59.4 |
–49.0 |
–63.1 |
–51.4 |
–59.6 |
–48.6 |
12. |
Selling Price |
Increase |
16.0 |
8.9 |
14.7 |
13.5 |
19.0 |
17.5 |
18.8 |
18.5 |
17.3 |
13. |
Profit Margin |
Increase |
–1.6 |
–17.3 |
–2.9 |
–11.3 |
–1.2 |
–17.9 |
–3.6 |
–15.1 |
–1.3 |
Net response is the percentage difference between the optimistic (positive) and pessimistic (negative) responses; responses indicating status quo (no change) are not reckoned. Higher ‘net response’ indicates higher level of optimism and vice versa.
E: Responses for expectation quarter. A: Responses for assessment quarter. |
|
VII.16 The results also pointed to deterioration
in the overall financial situation in Q2 of 2012-13, but showed a marginally improved outlook
for the ensuing Q3. The cost of external finance
is perceived to rise, but by a lower percentage
of respondents. The cost of raw material is also
expected to rise at a lower rate in the next
quarter. The profit margin, which has been
declining for the past few quarters, is expected
to remain at the same level in Q3 of 2012-13.
Consumer confidence yet to revive
VII.17 The Reserve Bank’s 10th round of the
Consumer Confidence Survey (http://www.rbi.org.in/CCS10),conducted in September 2012
indicates a decline in the index for the fourth
quarter in succession, though the decline turned
marginal in the latest quarter.
VII.18 The Current Situation Index, based on
current perceptions of economic conditions,
household circumstances, income, spending and
price level, was estimated to be 106.2 compared
with 106.7 in the preceding quarter. However,
the Future Expectations Index, based on
expectations of economic conditions, income,
spending, price level, and employment
prospects, declined substantially in this quarter
(Chart VII.2).
External agencies revise India’s growth
projections downwards
VII.19 The latest forecasts of GDP growth by
various agencies are in the range of 5.6 to 6.7
per cent (Table VII.4). These mark significant
downward revision from their earlier estimates.
The Asian Development Bank has lowered its
growth forecast for India to 5.6 per cent from
6.5 per cent, citing delayed reforms contributing to falling investment and consumption,
particularly in real estate and infrastructure.
VII.20 The IMF also revised its growth
projection for India downwards to 5.6 per cent
in October 2012. In its World Economic
Outlook, it noted that India’s growth has
suffered from waning business confidence amid
slow approvals for new projects, sluggish
structural reforms, policy rate hikes designed
to rein in inflation, and flagging external
demand. It added that given the high inflation,
India cannot afford to loosen its monetary policy
unless it slows down domestic demand with
more fiscal adjustments.
Table VII.4: Agencies’ Projections for 2012-13 |
Agency |
Latest Projection |
Earlier Projection |
GDP
Growth
(Per cent) |
Month |
GDP Growth (Per cent) |
Month |
1 |
2 |
3 |
4 |
5 |
Economic Advisory Council to the PM |
6.7 |
Aug-12 |
7.6 |
Feb-12 |
Finance Ministry |
7.6 (+/-0.25) |
Mar-12 |
- |
- |
ADB |
5.6 |
Oct-12 |
6.5 |
Jul-12 |
IMF* |
5.6 |
Oct-12 |
6.4 |
Jul-12 |
NCAER |
6.4 |
Jul-12 |
7.3 |
Apr-12 |
OECD (at market prices) |
7.3 |
May-12 |
7.5 |
Nov-11 |
World Bank |
6.0 |
Oct-12 |
6.9 |
Jun-12 |
*: Corresponds to the latest World Economic Outlook projection
of 4.9 per cent for GDP at market prices for calendar year 2012,
revised downwards from 6.1 per cent in July 2012. |
Survey of professional forecasters1
VII.21 Growth slowdown is also corroborated
by the results of the 21st round of the ‘Survey
of Professional Forecasters’ (http://www.rbi.org.in/SPF21) conducted by the Reserve Bank.The median growth forecast for 2012-13 has
been revised downward to 5.7 per cent from the
earlier 6.5 per cent. Overall, the GDP growth is
expected to pick up from Q4 of 2012-13.
Although, WPI inflation is expected to moderate
from Q4 of 2012-13, it is expected to remain
above 7 per cent till Q2 of 2013-14. The median forecasters also suggest some moderation in
current account deficit (CAD), but a marked
fiscal slippage in 2012-13 (Table VII.5).
Table VII.5: Median Forecasts of Select Macroeconomic Indicators by
Professional Forecasters 2012-13
and 2013-14 |
|
Actual
2011-12 |
Annual Forecast |
Quarterly Forecast |
2012-13 |
2013-14 |
2012-13 |
2013-14 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
14 |
15 |
16 |
1. Real GDP growth rate at factor cost (in per cent) |
6.5# |
6.5 |
5.7 |
7.0 |
6.6 |
6.3 |
5.5 |
6.6 |
5.6 |
7.0 |
6.2 |
7.1 |
6.4 |
– |
6.7 |
a. Agriculture & Allied Activities |
2.8# |
3.0 |
1.4 |
3.0 |
3.0 |
3.0 |
1.2 |
2.7 |
-0.3 |
2.9 |
1.5 |
2.8 |
2.4 |
– |
2.5 |
b. Industry |
2.6# |
4.0 |
3.0 |
5.7 |
5.3 |
3.7 |
1.9 |
5.0 |
3.2 |
5.5 |
3.9 |
6.0 |
4.6 |
– |
5.1 |
c. Services |
8.5# |
8.0 |
7.8 |
8.6 |
8.0 |
7.8 |
7.5 |
8.1 |
8.0 |
8.4 |
8.2 |
8.4 |
8.0 |
– |
7.9 |
2. Gross Domestic Saving (per cent of GDP at current market price) |
– |
31.3 |
30.3 |
32.2 |
31.6 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
3. Average WPI-Inflation |
8.9 |
7.3 |
7.7 |
6.8 |
6.7 |
7.6 |
7.6& |
7.4 |
8.0 |
7.2 |
7.7 |
6.5 |
7.0 |
– |
7.0 |
4. Exchange Rate (INR/1USD end period) |
51.2 |
53.0 |
52.0 |
51.0 |
50.8 |
55.0 |
52.7& |
54.5 |
52.5 |
53.0 |
51.5 |
52.5 |
51.5 |
– |
51.3 |
5. 10-year Govt. Securities Yield (per cent-end period) |
8.6 |
8.1 |
8.0 |
7.8 |
7.8 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
6. Export
(growth rate in per cent)@ |
23.7* |
12.0 |
0.0 |
17.0 |
12.0 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
7. Import
(growth rate in per cent)@ |
31.1* |
8.3 |
-0.9 |
14.3 |
12.7 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
8. Trade Balance (US$ billion) |
-189.8* |
– |
– |
– |
– |
-45.5 |
-46.6 |
-46.2 |
-46.5 |
-47.3 |
-47.6 |
-45.6 |
-45.2 |
– |
-47.0 |
9. Current Account Deficit
(per cent of GDP) |
4.2* |
3.6 |
3.5 |
2.8 |
2.7 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
10. Central Government Fiscal Deficit (per cent of GDP) |
5.1^ |
5.5 |
5.7 |
5.1 |
5.3 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
E: Previous Round Projection. L: Latest Round Projection. #: Revised Estimate. *: Preliminary.
- : Not Available. &: Actual. @: US$ on BoP basis. ^: Budget Estimate.
Note : The latest round refers to Twenty First round for the quarter ended September 2012, while previous round refers to Twentieth round
for the quarter ended June 2012.
Source : Survey of Professional Forecasters, Second Quarter 2012-13. |
Inflation expectations of households
decline
VII.22 The latest round of the Inflation
Expectations Survey of Households
(http://www.rbi.org.in/IESH29), indicates that
the perception of the current quarter inflation
(i.e., July–September 2012), as well as the
expectations on future inflation have decreased
(q-o-q). The percentage of respondents
expecting price rise ‘more than current rate’ in
the next quarter has decreased. However, it has
marginally increase in the case of expectation
for the next year as compared with the last round. The survey was conducted before the
diesel price hike.
Credible policy co-ordination key to push
the economy into growth gear
VII.23 The policy actions announced by the
government since September 2012 should be
seen as major initiatives to reverse the course
of the falling growth. As these measures are
implemented and feed through the system, they
will facilitate the recovery of India’s realised as
well as potential growth. Whether the recovery
will be quick or slow-paced would depend on
several factors, including global conditions,
which at the moment are not very conducive
despite some positive news on labour and
housing markets in the US. However, the key
to recovery lies in policy co-ordination among different government agencies and the removal
of structural bottlenecks in infrastructure
projects.
VII.24 It is also necessary to retain focus on
further improvement in macroeconomic
conditions by lowering the twin deficits. This
requires staying on the path of fiscal
consolidation, keeping a tab on private
consumption demand and supplementing it with
selective use of expenditure-switching policies
to lower the CAD. It is also important to ensure
that inflation stays below the threshold beyond
which high growth cannot be sustained.
VII.25 The exchange rate is not a foolproof
tool for addressing the challenges of structural inflation that we face today. Ultimately, fiscal
policy needs to work towards expediting supply-side
responses and keeping private consumption
demand under reasonable control.
VII.26 Monetary policy needs to be cautious
in the interim, focussing on inflation while using
the available space to support growth to the
degree it can. Lowering inflation is important
from consumer welfare and equity
considerations, as also for sustainable growth
over the medium-term. If risks to macroeconomy
from inflation and twin deficit recede further,
that could yield space down the line for
monetary policy to respond to growth concerns.
|