Monday, August 15th, 2022 08:28:24

Growth Projection and Taming of Inflation

Updated: March 10, 2019 4:45 pm

Basics of Growth and Checking the Inflation

Expansion of economy requires employment opportunities and a favourable environment for investment in saving. The RBI has resorted to cuts in Repo rate 25 bps this has paved the way for softer rate regime in the near future. What are perspectives of targeting inflation? The RBI has understood the implications of price pressure as the inflation targeting was the main policy of Monetary Authority for the last 2 years. The interest rate cycle based on receding inflation could be understood for a short term as indicated by the past experience. This is the opportune time where growth is projected at 7.5% in 2020 and this is part of the favourable environment in investment, saving and consumption. This benign inflation outlook will continue in the short term and the opportunity is for a shift in policy stance from inflation to neutral zone, leaving tightening policy. The Monetary Policy Committee (MPC) decided unanimously for a shift in stance to neutral from the tightening position and lowered the inflational forecast. The repo rate is the rate on which Central Bank gives loans to other banks. This will improve the credit rating of banks making them keeping thousands of crores of rupees for lending to a sector affected by concern over liquidity. Macro-economic configuration that is in the process, underscores the need to act now during the opportune time. The Monetary Authority expressed the view that it is time to address the objective of growth once the objective of stability has been achieved. Surprisingly the inflation looks benign despite adverse base effects and the sustained high core inflation that is non-food and fuel prices. Food inflation is on the downside with continuing deflation across many items and this has caused a moderation in inflation in cereals. This may be for a shorter period as the fuel prices may again rise because of external factors. Headline inflation is projected to remain soft in the near term, reflecting the current lower level of inflation and the benign food inflation outlook. The RBI has projected the inflation to 2.3% in fourth quarter of 2018-19. The projection for H1 in FY20 is at 3.2% to 3.4%. The RBI’s inflation target is 4% with a band of 2 percentage points on either side.

Volume growth recorded fastest annual growth during the last 7 years supported by monsoon that improved the market sentiment, nourished the hope of the demands for groceries, home and personal products. The adjustment is going on with GST along with other macro- economic factors. On the front of investment the foreign direct investment FDI grew 18% to Rs 28.25 lakh crore during the previous fiscal year. FDI increased by Rs 4,33,300 crore including revaluation of past investment during 2017-18. The census clarified that Mauritius continued to be the largest source of FDI in India at 19.7% followed by US, UK, Singapore and Japan.

Rural Demand and New Tax System
There seems to be clear buoyancy in rural demand which was somewhat slowed during the last few years. At the same time urban markets continue to grow, translating into higher volume led growth. The target of 4% of price increase, it is possible to have both value and volume growing in double digits. Drought had hit rural demand previously. The sales growth rate in the hinterland was double that of the cities that led to the overall driving force for FMCGs. Uncertainties over GST had created short term stress in 2016 but with the passage of time after 2016, decrease in GST rates on items of daily use has heightened the scope of increase in demand. The rural market was leading the urban growth, at the same time overall market grew 9 to 10% with volume growing 8.9% on annual basis. Prospects for faster growth in demand for daily groceries especially in rural areas looks uncertain in 2019. This may lead to increase in aggregate revenue growth and supported by monsoon conditions. Some of the states have also resorted to loan waiver considering the distress in agricultural sector. The situation may appear uncertain in future if the stimulus to push growth in rural income does not happen. There is also need for adjustment in the new tax regime. Most of the consumer companies have been raising prices and this has affected the cost system of consumer goods.

Reforms and Change  of Color of Government

India is a democratic state and growth must continue along with reforms in economic and social sectors. What is done to achieve this? Transfer of money is one of the major reforms, which is considered growth friendly. There has been exceptional performance in telecommunications, automobiles and software industries which have grown with the help of necessary reforms. Reform may be introduced by one or the other government and at the same time growth will continue with the change of color in administration. Election process should not impede the growth potentials in the economy. There is also the proposal that has appeared during the election campaign which is for universal basic income. Its feasibility is to be adjudged on the basis of initiatives and using the available pre specified income for implementation. All in all the process is going on for accelerating the potentials of growth.

Choices for India in 2019 and 2020

What are the available choices for India in 2019 and 2020 considering the background of reforms made during the last five years? The obvious choice is to maintain the reforms in tax structure and increase the spending in social field including health and education. For easy business, there is need to improve the social media and accelerate the educational spending keeping in view the target of new growth. Some of the parties are now raising doubts about the quota system and the message to the people is carried now for a better alternative the universal minimum income. The issue of growth is to accelerate the processes for future and this will continue for the successive governments.

By Manish Sharma

Comments are closed here.

Archives

Categories