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Slowdown impact: FY12 growth estimate scaled down to 7%

Easing inflation may be offset by rupee depreciation, rising fiscal deficit

BS Reporter  |  Mumbai 

Forecasters have revised the country’s growth projection downward, as global uncertainties now indicate the degree of the slowdown would be much higher than that anticipated earlier.

According to a survey of professional forecasters by the Reserve Bank of India (RBI), forecast for growth in gross domestic product (GDP) was scaled down by 60 basis points for 2011-12 and by 40 basis points for 2012-13. The revised GDP forecast for the current year now stands at seven per cent, down from 7.6 per cent earlier. For 2013, the growth forecast is now 7.3 per cent, compared with 7.7 per cent projected earlier.

“Although a moderation in growth was anticipated previously, developments over the past few months in the global economy indicate the degree and the spread of the slowdown may turn out to be higher than earlier thought,” RBI said in its third-quarter macro economic developments report released on Monday.

At the mid-quarter monetary policy review on December 16, the regulator had said it would revise the annual growth projection from 7.6 per cent during the third quarter monetary policy. The GDP growth, pegged at eight per cent in the beginning of the year, was revised downwards during the year, owing to uncertainty in the euro zone and high domestic inflation.

Though there has been a significant downward revision in growth, inflation, a major deterrent to growth, is expected to cool only gradually. “The survey results indicate lower optimism on growth, while inflation is expected to show gradual moderation,” the report said. However, the survey also revealed though expectations of inflation rose, the rate of increase in expectations has come down.

While the report said prices were expected to ease due to moderation in growth and declining international commodity prices, the positives may be offset by rupee depreciation and the growing fiscal deficit. “The pass-through of rupee depreciation and expansionary fiscal policy, however, have emerged as major risks, offsetting the favourable impact from lower demand pressures and commodity prices,” the report said. Suppressed inflation from energy prices and high wage inflation in rural areas are expected to increase upward risks to inflation.

Business confidence still remains low, despite the indication by RBI to make the policy pro-growth. “Weakening demand, increased global uncertainties, lower availability of credit, and higher input costs are seen to be significant factors affecting the overall business environment,” the report said.

The industrial outlook survey also showed a decline in the business expectation index. Respondents expect their profit margins to decline and cost of raw materials to rise.

Median forecast of macroeconomic indicators by professional forecasters 
  2011-2012 2012-2013
Real GDP growth rate at factor cost (in %) 7.6 7.0 7.7 7.3
Gross domestic saving
(in % of GDP at market price)
34.0 33.0 34.6 33.5
Average WPI inflation (%) 8.8 8.8 6.7 6.5
Exchange rate (INR/1 USD) 47.0 52.0 45.0 48.0

The report emphasised there was a need to maintain adequate capacity to absorb external shocks, as it was critical in a scenario of prolonged non-resolution of global problems.

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First Published: Tue, January 24 2012. 00:53 IST