Govt flags deflation as new challenge for economy

Says 2015-16 GDP growth still seen at around 8%

The government today flagged deflation as a new challenge for the economy but expressed hope that the growth will be close to 8% in the current fiscal year, notwithstanding lower first quarter GDP number. 

"Overall, economic growth is moving in the right direction, although its pace is still below what the economy needs... But at a pace that is expected to pick up in response to the ongoing reforms." 

"And one real challenge that looms ahead appears not to be the price inflation but the possible price deflation," Chief Economic Advisor Arvind Subramanian said. 

Talking to the reporters on below-than-expected first quarter growth, he said, the numbers suggest that "economy is recovering" and is consistent with the other more high-frequency indicators such as revenue collection and real credit growth. 

On growth forecast, he said, "the Economic Survey said 8-8.5%. Certainly if GDP numbers are reaccessed, we are closer to 8% than currently being forecast." 

Several agencies including Fitch and other experts have lowered the growth forecast for the current fiscal in light of the global financial turmoil and the slowdown in pace of reforms. 

The first quarter GDP data released by the government on Monday revealed that the economic growth, measured by GVA slowed to 7.1% as against 7.4% in the corresponding period last fiscal. The GDP, though expanded at 7%, up from 6.7%. 

As regards to inflation, the wholesale price index has been in the negative zone since November 2014, while the retail inflation (CPI) too has fallen sharply. 

Subramanian, however, evaded questions on the need to cut rates by RBI to bolster economy in wake of low inflation. 

RBI Governor Raghuram Rajan, who had cut rates by 0.75% in three tranches since January, maintained status quo in the last monetary policy review in August despite pressure from the industry and the government. 

The next policy is due on September 29.