RBI sees recovery consolidating this fiscal

The Reserve Bank of India (RBI), in its latest annual report published Wednesday, called last fiscal "a year of inflexions" for the Indian economy and expects recovery in growth to be "consolidated and built upon" this fiscal.

"The year 2017-18 turned out to be a year of inflexions in the growth path of the Indian economy, despite the lingering after-effects of demonetisation and the GST implementation," stated the central bank report.

And going by how the current macroeconomic factors are unravelling, the apex bank maintained its earlier projection of a 7.4% gross domestic product (GDP) growth this fiscal.

"Over the rest of 2018-19, the acceleration of growth that commenced in 2017-18: H2 (second half) is expected to be consolidated and built upon. Keeping in view the evolving economic conditions, real GDP growth for 2018-19 is expected to increase to 7.4% from 6.7% in the previous year, with risks evenly balanced," forecasts the RBI.

In its summary of how the economy performed in the year gone by, the central bank said the green shoots of recovery had started to appear from second quarter of the last fiscal as GDP growth picked up from a 13-quarter low of 5.6% in the first quarter of FY18 to reach 7.7% in the fourth quarter of the fiscal.

It attributed the massive recovery to the gross fixed capital formation (GFCF) "which snapped out of a four-quarter soft patch and posted expansion right through Q2 (second quarter) and until Q4 (fourth quarter)".

Other factors that drove up the economic growth were private final consumption expenditure (PFCE) supported by rural demand on the back of a bumper harvest and the government's thrust on rural housing and infrastructure.

"In contrast, support from government final consumption expenditure ebbed in relation to the preceding year and there was a leakage of domestic demand through net exports, in contrast to a slender contribution a year ago," noted the RBI.

It said despite the "diverse pull factors", the fact that the loss of speed in the real GDP growth was contained at just 0.4 percentage points on a year-on-year basis showed the "innate resilience" of the Indian and "onset of a new phase in the life of the economy".

D K Srivastava, chief policy advisor, EY India, said the RBI was only confirming the configuration of positive fundamentals in the economy.

"Growth has definitely picked up, and inflation is a little down. Growth is being supported by an uptick in private investment and so one also expects a build-up in the momentum of capacity utilisation due to the increase in demand as we come closer to the elections. In a way, it is indicative of healthy and sustained pick up in the economic growth, and RBI is only confirming that," he said.

On the supply front, agriculture posted an all-time high production of foodgrains and horticulture, and along with imports, which led to "excess supply conditions in crops such as rice, wheat, pulses and oilseeds, leading to prolonged deflation in the prices of pulses and oilseeds, and record buffer stock levels of rice and wheat – the highest in five years".

"The sizable erosion in the terms of trade of the farm sector under the weight of this supply glut emerged as an area of concern, however," the RBI pointed out. The central bank said the second half also saw a recovery in manufacturing and service sectors.

The RBI said even though the implementation of projects gained pace, the announcement of new private and public projects remained subdued.

On inflation, the apex bank said a deflation in food prices eased new consumer price index (CPI) series in June 2017 to its lowest level.

"Thereafter, a confluence of domestic and global developments pushed inflation up – an unseasonal spike in the prices of vegetables during October-November 2017, disbursement of house rent allowance (HRA) for central government employees under the 7th Central Pay Commission's award and firming up of global commodity prices. The delayed softening of food prices in Q4 brought relief as it got prolonged and in the event, the year ended with the lowest annual average inflation of 3.6% since 2012-13," states the central bank.

However, it warned of the upside risk to the headline inflation, which averaged 4.8% in the June quarter of the current fiscal, from a number of sources in the current fiscal. The RBI said this warranted "continuous vigil and a readiness to head off those pressures from getting generalised".

"Rising global commodity prices, especially of crude oil, and recent global financial market developments are firming up input cost pressures. The staggered impact of HRA revisions by various state governments would also pose an upside risk through second-round effects. Much will depend on how food prices play out and how effective are the supply management strategies," said the RBI enumerating the risks to inflation.

It guided headline inflation at 4.6% in the September quarter, 4.8% in the second half and 5% in the first quarter of the next fiscal. These projections included the HRA impact for central government employees.

The central bank said subdued growth in revenue and elevated revenue expenditure worsened the combined fiscal position of the Centre and states in relation to budgeted levels; "For the Centre, revenues were affected by lower collections from indirect taxes due to late implementation of GST; shortfall in non-tax revenue due to deferment of spectrum auctions; and, lower dividend receipts. In the event, cutbacks in capital expenditure were necessitated, with implication for the quality of fiscal adjustment. While state finances were budgeted to improve in 2017-18, revised estimates have been impacted by a shortfall in revenue receipts – mainly lower own tax revenue – and higher revenue expenditure due to the implementation of farm loan waivers and the pay commission recommendations on salaries and pensions".

The apex bank has lowered its estimate of the combined gross fiscal deficit of the centre and states to 5.9% of GDP in the current fiscal from 6.6% in 2017-18.

It feels the external sector remained resilient last fiscal despite a challenging global environment and noted that higher non-oil import volume along with erosion in trade, especially on account of the sharp increase in crude oil prices, widened the trade deficit to a five-year high.

"Services exports and remittances, however, offset this increase and kept the current account deficit (CAD) within sustainable limits. Net capital inflows – predominantly in the form of FDI and portfolio investment – exceeded the CAD and led to an increase in foreign exchange reserves during the year," the central bank said.

According to the RBI, the shift in "underlying fundamentals" resulted in Indian rupee appreciating by 3.1% last fiscal on a "nominal effective basis" and 4.5% in real terms.