On the retail inflation front, the Reserve Bank has marginally revised its outlook to 4.2%-4.6% in the second half of the current fiscal from the previous 4%-4.5%
The Reserve Bank of India (RBI) slashed its economic growth projection for the current fiscal to 6.7% from the earlier 7.3%, taking into account the disruptive effect of goods and services tax (GST) that was slowing recovery in investment activity due to uncertainties creeping into the manufacturing sector.
"Taking into account the outturn in the first half, the baseline assumptions, survey indicators and model forecasts, real GVA (gross value added) growth is projected at 6.7% for 2017-18 – 6.4% in Q2 (second or September quarter), 7.1% in Q3 (December quarter) and 7.7% in Q4 (March quarter) – with risks evenly balanced around this baseline path," wrote the central bank in its monetary policy review report that was released on Wednesday.
It has pegged the growth for the next fiscal at 7.4%, "assuming a normal monsoon, fiscal consolidation in line with the announced trajectory, and no major exogenous/policy shocks".
After two quarters of weak gross domestic product (GDP) growth – 5.7% in the June quarter and 6.1% in the March quarter – most rating firms and financial institutions have revised downward their forecast for economic growth in FY18.
Fitch Ratings has brought it down to 6.9% from 7.4%, India Ratingsand Research to 6.7% from 7.4% and Asian Development Bank (ADB) to 7% from 7.4%. All of them have cited weakness in private consumption and investment and delay in recovery in the manufacturing sector as reasons for cutting their growth outlook.
The RBI, in its report, said early estimates of kharif foodgrains production also drove down its economic outlook. However, "adverse impact" of GST was the major factor that led the central bank to lower its GDP growth forecast.
"The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance-sheets of banks and corporates," it states in its report.
It expected economic activity to recover with an improvement in services sector despite "anaemic" investment activity.
On the retail inflation front, the Reserve Bank has marginally revised its outlook to 4.2%-4.6% in the second half of the current fiscal from the previous 4%-4.5%. It said that the actual rise in inflation, excluding food and fuel, was higher-than-expected on account of prices of pulses stabilising, price revision due to GST and firming up of global crude prices.
"Taking into account these factors, inflation is expected to rise from its current level and range between 4.2-4.6% in the second half of this year, including the house rent allowance by the centre," said the RBI.
The central bank stated that inflation was expected to move up as "favourable base effects" reversed and higher house rent disbursed by the central government.
It estimated that if crude prices were to touch $65 per barrel in the second half of FY18, it would push up inflation by about 30 basis points (bps) above the baseline and weaken GVA growth by 15 bps "due to the direct impact of higher input costs as well as spill-overs from lower world demand". At $50 per barrel, RBI believes inflation would ease by about 15 bps and GVA growth bolstered by around 5-10 bps above the baseline in 2017-18.
The central bank expects several other factors like implementation of farm loan waiver by some states and the impending hike in salary and allowances of state government employees to further push up the inflation rate.
"An increase by states similar to that by the centre (in salaries and allowances of government staff) could push up headline inflation by about 100 basis points above the baseline over 18-24 months, a statistical effect that could have potential second round effects," the central bank warned.
A statement issued by the finance ministry said upward revision of inflation meant average inflation of less than 4% for the whole year.
"A downward revision of the real GVA growth forecast for 2017-18 from 7.3% to 6.7%, which leads to a widening of the output gap; and a marginally upward revision of the CPI inflation forecast for the second half of the year meaning an average inflation for the year 2017-18 as a whole of less than 4%," said the ministry note.
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