RBI retains GVA growth at 7.3% for FY18

Growth will be driven by consumption but reduction in lending rates should support investment demand

Gross value added (GVA) would grow by a higher rate of 7.3 per cent in the current financial year, against 6.6 per cent a year ago, the Reserve Bank of India said on Wednesday.

The growth would be driven by consumption, it said in its Annual Report for FY17, but reductions in bank lending rates after demonetisation should support investment demand of stress-free companies.

The announcement comes a day before the release of the gross domestic product (GDP) data for the first quarter of 

2017-18.

Continuing re-monetisation should enable a pickup in discretionary consumer spending, especially in cash-intensive segments, the annual report said. Government spending continued to be robust, cushioning the impact of a slowdown in other constituents.

On the negative side, global risks were elevated and rising input costs might be a drag on the profitability of firms, pulling down overall GVA growth, it said. Aggregate demand could be curtailed if state governments restrained or scaled down capital spending, keeping in view the objective of fiscal consolidation. Besides, the twin balance sheet problem — an over-leveraged corporate sector and a stressed banking sector — might delay a revival in private investment.

The central bank said risks were evenly balanced to its projection of 7.3 per cent GVA growth. 

CARE Ratings Chief Economist Madan Sabnavis pegged GDP growth of this financial year at 7.6-7.8 per cent, which would translate into a GVA growth of 7.4-7.6 per cent.  Sabnavis explained that the diminishing impact of demonetisation, normal monsoon and an expected spurt in demand in the festival season were the reasons he was more optimistic than the central bank. He based his GDP forecast for the entire year on a projection of 6.5 per cent growth in the first quarter of 2017-18. "If GDP growth falls below this number in Q1, then we will revisit our forecast for the entire economy."

The RBI also said a normal monsoon, resultant replenishment of reservoirs, policy initiatives such as higher minimum support prices and wider crop insurance coverage were likely to help in boosting crop production and supporting rural demand.

The central bank said strengthening external demand might play a role in supporting the domestic economy. 

The implementation of house rent allowance according to the recommendation of the 7th Central Pay Commission for central government employees from July 2017 and the possibility of its implementation at the state level should strengthen the urban consumption demand.

The central bank projected overall Consumer Price Index-based inflation in the range of 2.0-3.5 per cent in the first half of 2017-18 and 3.5-4.5 per cent in the second half. It said even as the Centre made significant efforts toward fiscal consolidation, the higher debt burden of the states could push general government debt.