Opinion Over to the RBI

The big budget numbers are the following — GDP nominal growth of 13.4 per cent,expenditure growth of 16.4 per cent,and tax revenue growth of 19.1 per cent. Add “other receipts” growth of 132 per cent,and you achieve the magic number of the fiscal deficit being 4.8 per cent of GDP in 2013-14. The most important number in this galaxy is nominal GDP growth of 13.4 per cent. How realistic?

Nominal GDP growth is the sum of inflation (as measured by the GDP deflator) and growth. Unfortunately,and doubly so,In a Country Like India (ICLI,rhymes with idli) with faulty statistics and faultier interpretations,there are two estimates of GDP available — at market prices,the convention in most of the world,and factor cost prices,almost unique to ICLI. With twin estimates,you get twin everything — growth,inflation,etc. One approach is to take just one estimate,but that is not quite kosher. For 2012-13,the economic survey does a mixture — it takes nominal GDP growth in market prices (11.7 per cent) and real GDP growth in factor cost (5 per cent). The difference between the two yields inflation of 6.7 per cent for the year.

There is an alternative approach — take the average growth,and average inflation,of the twin estimates. Remember,our main objective is to estimate what nominal growth is likely to be in 2013-14,and taking the averages should eliminate most of the data noise in the system. Unless otherwise mentioned,all estimates below will refer to the average estimates.

First,let us examine the data for the year just ending,2012-13. There are several important conclusions which follow. First,that the controversial GDP growth estimate of 5 per cent (factor cost) for FY 2012-13 is likely to be missed,but not by much. Seasonally adjusted GDP data do show an acceleration,and indicate that the economy bottomed out in the second quarter. Blufin’s proprietary confidence index,as well as its Business Cycle Indicator,also support the conclusion derived from the GDP data. So while scepticism abounds,the Manmohan Singh government is not wrong when it states that the economy has bottomed,and is improving. (Parenthetically,I also fully support the UPA conclusion that potential GDP growth in India is above 8 per cent,a conclusion at variance with many experts including the IMF — but that is a subject best left for later).

Now to the more interesting estimates for inflation. No matter what time-period is chosen (three,six,nine or 12 months),inflation has fallen towards the low 7 per cent range. And inflation is likely to fall towards the 5 per cent level over the next 12 months. There are several reasons for this (likely) occurrence. Most importantly,the rate of inflation of food prices should stabilise at around 6 per cent,a large 4 percentage point decline from present levels. Note that,despite food inflation averaging above 10 per cent for the last several years,the GDP deflator has moved lower by more than 2 percentage points from the peak of 9.7 per cent in 2010.

So a reasonable estimate of inflation in 2013-14 is 5.5 per cent; with luck and a sensible UPA and sensible RBI (see below for both),Indian growth should exceed 7 per cent in January-March 2014,and average 6.5 per cent for the year. This would yield nominal GDP growth about 1.5 per cent less than that budgeted.

The key decision awaiting India is not from the budget just announced,and not even from the RBI decision on March 18. Rather,it is the announcement next month by Manmohan Singh on the procurement price of rice. Technically,this decision is made by the head of the Commission for Agricultural Costs and Prices,Ashok Gulati,but even he recognises that the decision is not at all his. Before the advent of Soniaism,circa 2006,this used to be a technocratic decision. Since 2006 full bloom Soniaism,the procurement price of rice has increased at an average rate of 13.6 per cent per annum,and that of wheat by 10 per cent. This sequence of irresponsible price increases has not got the Congress any votes — indeed,they have lost votes because of inflation spiralling upwards,and growth spiralling downwards.

Thankfully,it now appears that Soniaism has realised its limitations. In October,wheat prices were raised by only 5 per cent,and next month,the paddy procurement price increase should be less than 5 per cent. And given the extra large inducements given to rice,parity with wheat can be achieved by announcing a zero price increase for rice. (Procurement prices do not decline in India.) Assume this were to happen,though with Soniaism one is never quite sure. This would mean a more than 4 percentage point decline in procurement price inflation,which should lead to a 1.5 percentage point decline in CPI inflation — and cause the GDP deflator to rise by only 5 per cent in 2013-14.

Instead of changing its policy goalposts more often than most people change their toothbrushes,the RBI should state clearly that Indian inflation has been primarily food inflation — and that a necessary and near-sufficient condition for food inflation to decline is that procurement prices be contained. There hasn’t been,nor is there at present,any excuse for the RBI to not make this connection explicit. The finance ministry’s economic survey has said it,so why can’t the RBI just say it? What is holding it back? Perhaps the belief that saying this would forcefully reject its outdated monetarist ideology? Is it so difficult for the RBI and its prominent mentors to admit that they have been frightfully wrong in interpreting the determinants of Indian inflation in the years of Soniaism? How much will Indian growth,jobs and poverty reduction be sacrificed at the joint altars of Soniaism and monetarism?

The UPA government has already made a down payment towards a better tomorrow by sensibly raising wheat prices by only 5 per cent in October 2012. Budget 2013-14 is neutral in its down-payment to the RBI,but it did make one by reducing the deficit to “only” 5.2 per cent in 2012-13. Enough reason for the RBI to cut repo rates by 50 basis points on March 18,and indicate a further 50 basis-point cut in April,contingent upon a less than 5 per cent increase in rice prices. It is now over to the RBI.

The writer is chairman of Oxus Investments,an emerging market advisory firm,and a senior advisor to Blufin,a leading financial information company