GDP forecast slashed to 5.5%

Jan 30 2013, 08:34 IST
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RBI says govts policy initiatives will take time to reverse the investment slowdown. (Reuters) RBI says govts policy initiatives will take time to reverse the investment slowdown. (Reuters)
SummaryRBI says govts policy initiatives will take time to reverse the investment slowdown.

The Reserve Bank of India has slashed the baseline projection of GDP growth for the current year from 5.8 per cent to 5.5 per cent with the decline in the growth rate becoming more broad based, consumption demand also slowing alongside stalling investment and exports declining. However, in FY14, the RBI appears to be more sanguine as it expects a slow recovery ahead.

In July 2012, the RBI projected GDP growth for the current year, 2012-13, of 6.5 per cent. In the October Review, it revised this downwards to 5.8 per cent, signalling increasing global risks as well as accentuated domestic risks. The RBI revisited this growth projection taking into account developments over the last three months.

During this period, industrial activity has remained subdued. Sluggish external demand continues to inhibit improvement in services. While the coverage of rabi sowing has picked up, severe winter in certain parts of the country could affect crop prospects. New investment demand, which should be the key driver of an upturn, continues to be weak. While the series of recent policy initiatives by the government has boosted market sentiment, it will take some time to reverse the investment slowdown and reinvigorate growth, RBI governor D Subbarao said while unveiling the third quarter monetary policy.

The GDP growth dropped to 5.5 per cent in the first quarter, and falling even further to 5.3 per cent in the second quarter. The RBI said headline WPI inflation eased significantly from 8.1 per cent in September 2012 to 7.2 per cent by December. Notably, inflation on account of non-food manufactured products, which have a weight of 55 per cent in the WPI, fell sharply in November-December as input price pressures eased.

The RBI expects WPI inflation to remain range-bound in FY14. According to the guidance, this provides space, albeit limited for monetary policy to give greater emphasis to growth risks.

The RBIs industrial outlook survey also points to a softening of the rate of increase of output prices, suggesting that the pricing power of corporates has weakened. Fuel inflation moderated in December, reflecting the tempering of inflation of non-administered petroleum products and the range-bound exchange rate of the rupee.

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