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Baseline Scenario: After a gloomy mid-year picture, RBI’s brighter growth forecast for FY17

Deflator is the inflation measure used to convert estimates of nominal GDP into real, inflation-adjusted terms. The national accounts rely on a combination of CPI and WPI deflators to translate nominal growth into real terms.

Written by Aanchal Magazine |
Updated: January 5, 2016 6:00:04 am

Close on the heels of Mid-Year Economic Review painting a grim picture for India’s nominal Gross Domestic Product (GDP) growth rate for next year, the Reserve Bank of India in its Medium-Term Debt Management Strategy has outlined a baseline scenario of higher growth rate of 12.2 per cent for 2016-17, sticking to the envisaged fiscal deficit target of 3.5 per cent of the GDP for next fiscal.

Last month, the Mid-Year Economic Review had sharply lowered projection for this year’s nominal GDP growth rate to 8.2 per cent from 11.5 per cent assumed in the Budget and stated that real GDP growth rate for next year is unlikely to be significantly higher than this year’s growth.

Deflator is the inflation measure used to convert estimates of nominal GDP into real, inflation-adjusted terms. The national accounts rely on a combination of CPI and WPI deflators to translate nominal growth into real terms.

Though the RBI believes the baseline scenario is expected to be “somewhat closer to the reality”, it also offers two other scenarios that state a varied picture of how India’s borrowing costs could pan out in case India’s growth slows down next year, as has been widely anticipated.

gloomy“Indian economy is expected to gain momentum from 2015-16 onwards facilitated by pick-up in economy activity supported by monetary policy easing by the Reserve Bank. Nominal GDP is expected to grow by 11.5 per cent, both in 2014-15 and 2015-16. With gradual growth acceleration and under assumptions of continuing price stability, the growth rate of the GDP at current prices during 2016-17 and 2017-18 is assumed to be around 12.2 per cent and 12.4 percent respectively,” RBI has said in its report.

The baseline scenario assumes inflation rate in line with the inflation targeting path of the RBI, which has pegged CPI (Combined)-based inflation rate at under 6 per cent by January 2016, with the goal for 4 per cent from 2016-17 onwards, with band of +/- 2 per cent. For the years 2015-16 to 2017-18, the RBI has assumed that the economy will record moderate to reasonable growth and a moderation in inflation. Notwithstanding global uncertainties, the economy is expected to remain resilient on favourable domestic macroeconomic factors backed by stable growth with low inflation.

The RBI, however, has detailed other plausible scenario of higher nominal growth rate of 13.5 per cent, 14.0 per cent and 14.5 per cent respectively in 2015-16, 2016-17 and 2017-18, which will subsequently result in higher borrowing yet remain in line with the fiscal deficit targets in percentage terms. Assuming a nominal GDP growth rate of 13.5 per cent and fiscal deficit of 3.5 per cent of the GDP for 2016-17, the RBI has projected a gross borrowing of Rs 659,070 crore as against Rs 600,000 for this year.

In another scenario, assuming adverse economic conditions, the central bank has projected nominal growth rate of 10.5 per cent, resulting in sharply higher gross borrowing of Rs 766,246 crore or a fiscal deficit of 4.5 per cent of the GDP.

“A growth rate of 12.2 per cent is achievable next year so, the government’s borrowing till Rs 6.3 lakh crore for 2016-17 will be ideal. But a higher borrowing of Rs 6.5 lakh crore won’t be taken too kindly by the market,” State Bank of India’s chief economic adviser Soumya Kanti Ghosh said.

Economists believe the baseline view of 12.2 per cent growth is likely to hold true, but there may still be slippage on the government’s fiscal deficit front on account of implementation of One Rank One Pension and the Seventh Pay Commission.

“Commodity prices are expected to stabilise in the year ahead, so with deflation in WPI likely to end soon, the deflator used for GDP calculations will moderate and lead to a higher growth rate. For 2016-17, even though it looks better on the growth front, there are pending payouts for One Rank One Pension and the Pay Commission. These would make fiscal deficit target challenging for 2016-17 and the assumption of 3.5 per cent fiscal deficit aim for next year by the RBI may see a shortfall at around 3.6 per cent,” Sonal Varma, Economist, Nomura India, said.

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