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Cautious look at India's growth

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  16 Jun 2015 12:00 AM GMT

The rest of the world presently seems more upbeat about the Indian economy than its own central bank. In its latest ‘Global Economic Prospects’ report, the World Bank has projected a 7.5 per cent rate of growth for the Indian economy, the fastest in the world. India is expected to just about nose ahead of Chi which is expected to clock a GDP growth of 7.1 per cent. The World Bank ascribes India’s current fast track growth to falling prices of crude oil, as the country is dependent on imported oil for much of its fuel needs. The rendra Modi government’s commitment to economic reforms also seems to have raised confidence levels of investors and market operators. The World Bank’s optimism is quite in line with earlier projections by the Intertiol Monetary Fund (IMF) and the Asian Development Bank (ADB) which had forecast India will grow at 7.5 per cent and 7.8 per cent respectively in the current fincial year. In fact, the World Bank expects the Indian economy to grow faster at 7.9 per cent next fiscal, then rise to 8 per cent in 2017-18. However, it sees a dark cloud on the horizon in the form of an expected hike in the US interest rates which could significantly reduce capital flows to emerging countries, including India. Meanwhile, the Reserve Bank of India has struck a note of caution, as reflected in its latest monetary policy review.

Using a different parameter to measure growth, mely the GVA (gross value added), the RBI has lowered growth projections to 7.6 per cent from 7.8 per cent estimated in April this year. Recent increase in global oil prices as well as its likely impact on inflation in India, along with deficient monsoon for the second successive year — are all adding to the RBI’s latest worries. The central bank has sought to tweak only the repo rate, the interest rate at which banks borrow from the RBI, downwards from 7.5 per cent to 7.25 per cent. This has been interpreted as a cautious encouragement to banks and markets to keep up the growth momentum. Public sector banks are expected to pass on the benefit by cutting lending rates and thereby making housing, car and business loans slightly cheaper. However, the RBI left other policy tools like Cash Reserve Ratio (CRR) unchanged at 4 per cent and Statutory Liquidity Ratio (SLR) at 21.5 per cent. RBI Governor Raghuram Rajan has publicly expressed doubts about the country’s latest economic growth figures, pointing to weak investment and less-than-impressive corporate results. Then there are monsoon worries, with expected below normal rains pushing up food prices and hitting non-food spending of consumers. It remains to be seen whether the Central government’s latest strategy of hiking public spending on roads, railways and ports to off-set the impact of sub-par rains, will pay off this year.

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