The Reserve Bank of India (RBI), as a rule, is quite guarded in presentation of its views as it has far reaching implications for the market. Further, the credit policy which is announced every two months gives an update on the state of the economy as well as the way forward with conjectures on inflation and GDP (gross domestic product) growth. Therefore, the RBI Annual Report, which is also looked upon as an economic recap of the past year and a prognosis for the current year, cannot be expected to say anything very different. In a way, it consolidates all its views that may be found in other reports, like say the one on state finances that highlights the risks to the overall fiscal in one place.
So how is one to read this document? There is a comprehensive recap over developments in 2017-18 which point to a lower performance with the GST (goods and services tax) being a disruption, which can be looked at positively. Against this background, the RBI is pitching for an improved performance this year. It looks at agriculture being a big plus, as is industry. It is more sanguine on capital formation and hence investment, and has used growth in capital formation to indicate there has been a pick-up. This is despite gross fixed capital formation rate remaining unchanged for the last three years. Industrial growth is projected to be better, as will corporate performance and services. All these back up the forecast of 7.4% growth in GDP for the year. However, global shocks are a key riskthat the RBI highlights which can distort the picture. This sounds fair enough.
If one were to dig a bit deeper, one can sort of question this picture. The report says upfront that there were three factors that provided strength to the economy last year. These were easing inflation, low current account deficit and fiscal stability post GST. If these were the pillars - as highlighted in the report - one can turn a bit sceptical when looking into the future by analysing the same in the present context.
Inflation is moving up continuously and going by the numbers till July, the non-food component is over 5 per cent for all components and looks like only increasing. In fact, the strength of revival of pricing power pointed out by the report for corporates also means that these numbers have to increase. It is a zero sum game after all. The RBI has raised rates twice this year. Second, the current account deficit is going to widen for sure. Crude oil seems to be the spoilt sport and will exert pressure on the trade balance. It may not cross 3 per cent but will be an irritant when it comes to policy. This is because the weakening of the rupee due to external factors can exacerbate the forex issue. Third, the fiscal balances which were steady will still face the rest of time as a pre-elections year has all the accompanying risks, which go with fiscal slippage. Therefore, the very positive outlook painted in the report could get pressurised on the strengths of last year in case they turn into weaknesses.
An area where the report has been factual is banking. While highlighting the challenges of banks with respect to capital and asset quality, it has highlighted its reposition process which was put in place in February. The report, however, has been fairly non-committal on the efficacy of the same and the expected impact on banks and asset quality. This in fact is one major risk which we know today could just make the NPA issue linger on for some more time. Therefore, the reader has been left to make conjectures here.
As regards the surpluses that are transferred to the government, two observations stand out. The first is that the cost of employees has come down by around Rs 8 crore, which goes along with a lower staff strength. This is significant as the focus of several public sector companies has been towards staff reduction at a time when there is thrust on job creation. This has been seen also in central and state governments. The second is the fall in cost of printing currency by around Rs 30 crore. This probably means that the currency situation is back to normal and the economy is well stocked.
Interestingly, the currency notes that have been in circulation by March now is fully back to normal which can also mean that post demonetisation, everything has come back to the system. If this were so, the digitisation numbers could just mean that more small value transactions are talking place thought the electronic mode, but cash is still popular with households.