Slowing down: GDP growth target cut to 7%

In its October 2011 review,the RBI projected GDP growth of 7.6 per cent for 2011-12,though with significant downside risks

Written by ENS Economic Bureau | Mumbai | Published: January 25, 2012 12:36:17 am

The Reserve Bank of India has cut the baseline projection of GDP growth for this year (2011-12) from 7.6 per cent to 7.0 per cent in the wake of the increase in global uncertainty,weak industrial growth,slowdown in investment activity and deceleration in the resource flow to the commercial sector. However,keeping in view the expected moderation in non-food manufactured products inflation,domestic supply factors and global trends in commodity prices,the RBI has retained the baseline projection for WPI inflation for March 2012 at 7 per cent as set out in its October policy review.

In its October 2011 review,the RBI projected GDP growth of 7.6 per cent for 2011-12,though with significant downside risks. These downside risks have since materialised,it said. Real GDP growth moderated from 7.7 per cent in the first quarter of 2011-12 to 6.9 per cent in the second quarter.

“This was mainly due to deceleration in industrial growth,while the services sector held up relatively well. GDP growth in the first half of 2011-12 slowed to 7.3 per cent,down from 8.6 per cent in the first half of last year,” RBI Governor D Subbarao said.

On the demand side,the contraction in fixed capital formation in the second quarter was the main factor behind the slowdown in growth. This pattern,should it persist,will hurt medium-term growth prospects,further aggravate inflationary pressures,and threaten external and internal stability.

“The global environment is only partly responsible for the weak industrial performance and sluggish investment activity; several domestic factors (unhealthy fiscal situation,high interest rates,policy and administrative uncertainty) are also playing a role,” it said.

On retaining the inflation estimate,Subbarao said,“This runs counter to the expectation that a significant downgrade in the growth projection should lead to a downward revision in the inflation projection. Why has that not happened? That has not happened for two reasons. First,the rupee depreciation has been feeding into core inflation,delaying the adjustment of inflation to slower growth. Second,and very importantly,suppressed inflation in petroleum product and coal prices remains quite significant.”

Rationalisation of these prices is,of course,welcome for a variety of well-known reasons,but it will impact observed inflation in the short term. “Our projection of inflation,accordingly,is based on the likelihood of some adjustments being made in these prices,” he said.

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