RBI's Annual Monetary Policy Statement for the Year 2013-14
- 3rd May 2013
I. The State of the Economy
6. Global economic activity remains subdued amidst signs of diverging growth paths across major economies. In the US, a slow recovery is taking hold, driven by improvements in the housing sector and employment conditions. However, the pace of recovery remains vulnerable to the adverse impact of the budget sequestration which will gradually gain pace in the months ahead. Japanís economy stopped contracting in Q4 of 2012. There has been some improvement in consumer confidence on account of monetary and fiscal stimulus along with a pick-up in external demand on the back of a weakening yen. In the euro area, recessionary conditions, characterised by deterioration in industrial production, weak exports and low domestic demand, continued into Q1 of 2013. High unemployment, fiscal drag and hesitant progress on financial sector repair have eroded consumer confidence.
7. Growth in several EDEs rebounded from the moderation in 2012 as domestic demand rose on a turnaround in the inventory cycle and some pick-up in investment. Among BRICS countries, growth accelerated in Brazil and South Africa, while it persisted below trend in China, Russia and India.
8. Inflation has remained benign in the AEs in the absence of demand pressures, and inflation expectations remain well-anchored. The EDEs, on the other hand, present a mixed picture. While inflation has picked up in Brazil, Russia and Turkey, it has eased in China, Korea, Thailand and Chile.
9. Reflecting a pessimistic demand outlook, crude oil prices eased in March-April 2013 from the elevated levels prevailing through 2012. Non-energy commodity prices have been easing through Q1 of 2013 on softening metal prices and decline in food prices.
10. With output expansion of only 4.5 per cent in Q3 of 2012-13, the lowest in 15 quarters, cumulative GDP growth for the period April-December 2012 declined to 5.0 per cent from 6.6 per cent a year ago. This was mainly due to the protracted weakness in industrial activity aggravated by domestic supply bottlenecks, and slowdown in the services sector reflecting weak external demand. The Central Statistics Office (CSO)ís advance estimate of GDP growth for 2012-13 of 5.0 per cent implies that the economy would have expanded by 4.7 per cent in Q4.
11. The growth of industrial production slid to 0.6 per cent in February 2013 from 2.4 per cent a month ago, mainly due to contraction in mining and electricity generation and slowing growth in manufacturing. Consequently, on a cumulative basis, growth in industrial production decelerated to 0.9 per cent during 2012-13 (April-February) from 3.5 per cent in the corresponding period of the previous year. The Reserve Bankís order books, inventories and capacity utilisation survey (OBICUS) suggests that capacity utilisation remained flat. Rabi production, particularly of pulses, is expected to be better than a year ago. However, it may not fully offset the decline in kharif output. Consequently, the second advance estimates of crop production (kharif and rabi) for 2012-13 indicate a decline of 3.5 per cent in relation to the final estimates of the previous year. The composite purchasing managersí index (PMI), which encompasses manufacturing and services, fell to a 17-month low in March 2013. Thus, most recent indicators suggest that growth in Q4 of 2012-13 would have remained low.
12. On the demand side, the persisting decline in capital goods production during April 2012 Ė February 2013 reflects depressed investment conditions. The moderation in corporate sales and weakening consumer confidence suggest that the slowdown could be spreading to consumption spending.
13. Headline inflation, as measured by the wholesale price index (WPI), moderated to an average of 7.3 per cent in 2012-13 from 8.9 per cent in the previous year. The easing was particularly significant in Q4 of 2012-13, with the year-end inflation recording at 6.0 per cent. Notwithstanding the moderation in overall inflation, elevated food price inflation was a source of upside pressure through the year owing to the unusual spike in vegetable prices in April 2012 followed by rise in cereal prices on account of the delayed monsoon and the sharp increase in the minimum support price (MSP) for paddy. Fuel inflation averaged in double digits during 2012-13, largely reflecting upward revisions in administered prices and the pass-through of high international crude prices to freely priced items. Non-food manufactured products inflation ruled above the comfort level in the first half of 2012-13 but declined in the second half to come down to 3.5 per cent by March, reflecting easing of input price pressures and erosion of pricing power.
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