RBI cuts growth forecast to 6.7% on GST, lower farm output

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The Reserve Bank today sharply revised downwards its growth projection to 6.7 per cent for the current fiscal, from 7.3 per cent earlier, due to lower kharif foodgrain production and disruptions arising from the implementations of GST.
The Goods and Services Tax has led to some uncertainty in the manufacturing sector, which is likely to delay revival of investment activity, it said.
"The projection of real GVA growth for 2017-18 has been revised down to 6.7 per cent from the August 2017 projection of 7.3 per cent, with risks evenly balanced," RBI said in its fourth bi-monthly monetary policy statement of the current fiscal, leaving the key policy rate unchanged.

It said the loss of momentum in first quarter (April- June) of 2017-18, when GDP slipped to a three year low of 5.6 per cent, and the first advance estimates of kharif production are early setbacks that impart a downside to the outlook.
The GST implementation so far also appears to have had adverse impacts on growth, rendering an uncertain future for the manufacturing sector in the short term, it added.
"This may further delay the revival of investment activity, which is already hampered by stressed balance-sheets of banks and corporates," RBI said.

At the customary post-policy meeting, Governor Urjit Patel, however, said there are factors that have affected the growth in the second quarter of this year and some of these factors will dissipate.

"In recent days, high frequency indicators suggest that the growth is in the uptick. Core IIP released yesterday was 4.9 per cent. In the second quarter, the services sector has been showing healthy growth rate. So, there is a possibility that the cyclical upturn will happen in the next two quarters," Patel said.
The teething problems linked to GST rollout may get resolved relatively soon allowing growth to accelerate in second half, he said.
Echoing similar sentiments, deputy governor Viral Acharya said: "It is too early. However, in my view and real time activity indicators do not yet paint the clear picture to be able to separate the transient component of this one quarter loss of momentum from the gradual decline in overall growth that has taken hold since Q1 of last fiscal."

He further said: "The long term trend is best explained by the develeraging underway in the heavily indebted part of the corporate sector and in poor credit growth at public sector banks given they have inadequate capital relative to impending losses on their legacy assets."
The Asian Development Bank too has lowered the growth projection to 7 per cent for the current fiscal from its earlier estimate of 7.4 per cent.
The real GVA growth slowed significantly in the June quarter, cushioned partly by the extensive front-loading of expenditure by the Centre, thus running up 96.1 per cent of its fiscal deficit as of end August.

GVA growth in agriculture and allied activities also slackened quarter-on-quarter in the seasonal first quarter moderation, partly reflecting deceleration in the growth of livestock products, forestry and fisheries.
Industrial sector GVA growth fell sequentially as well as on a y-o-y basis. The manufacturing sector, the dominant component of industrial GVA, grew by a pale 1.2 per cent, the lowest in the last 20 quarters.
RBI said the uneven spatial distribution of the monsoon was reflected in the first advance estimates of kharif production by the Union agriculture ministry, which were below the level of the previous year due to lower area sown under major crops including rice, coarse cereals, pulses, oilseeds, jute and mesta.

RBI further said the assessment of food prices going forward is "largely favourable", though the first advance estimates of kharif output pose some uncertainties.