Macroeconomic and Monetary Developments in the Third Quarter of 2011-12
-Released on January 23, 2012
The Reserve Bank of India released its Macroeconomic and Monetary Developments: Third Quarter Review 2011-12. The document serves as a backdrop to the Monetary Policy Statement to be announced on January 24, 2012.
Highlights of Macroeconomic and Monetary Developments in the Third Quarter of 2011-12 :
While growth outlook weakens, inflation risks remain
The Growth outlook has weakened as a result of adverse global and domestic factors. However, inflation and expectations of inflation remain high and upside risks emanate from exchange rate pass-through, revisions in administered prices and higher-than-expected government revenue spending. Consequently, monetary actions will need to strike a balance between risks to growth and inflation.
Growth in 2011-12 is moderating more than was expected earlier. The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13.
While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns, in the absence of structural measures to address supply bottlenecks, this will be, at best, a temporary respite. In addition, the expansionary fiscal stance has emerged as an upside risk to inflation.
Global Economic Conditions
Global growth moderates, financial market stress rises
The global economy seems to be headed for another downturn after just three years. The recovery is likely to lose traction due to the continuing euro area debt crisis. As fiscal austerity progresses, the euro area could enter into a recession. With growth decelerating even in emerging and developing economies (EDEs), the spillovers from euro area are likely to pull down global growth.
An adverse feedback loop between bank and sovereign debt brought euro area closer to contagion across the region. Tightening credit conditions, rising risk premia, deleveraging, weakening growth in the euro area are keeping global financial markets under stress. Going forward, further softening in commodity prices on the back of weaker global growth is likely in 2012-13. However, upside risks to the oil price remain, including from recent geo-political uncertainty.
Global linkages reinforce domestic factors to slow down economy
Agricultural prospects remain encouraging but moderation is visible in industrial activity and some services. Industrial slack has emerged as export and domestic demand has decelerated. A strong co-movement between domestic and global IIP series is observed. The RBI survey shows significant growth in new orders for some industries, but flat capacity utilisation in Q2 of 2011-12.
Growth in 2011-12 is likely to moderate to below trend given the external conditions, dampened investment demand and prevailing high level of inflation. Growth outlook will depend on global conditions and domestic policy reforms
External and investment demand may drag growth
Growth has been impacted by lower external and investment demand which may also act as a drag during 2012-13. There has been a sharp decline in planned corporate fixed investment since H2 of 2010-11 and this trend has accentuated further in Q2 of 2011-12.
Private consumption continues to moderate. There has been some slackening of corporate sales growth, reflecting a gradual waning of demand. Available early results for Q3 of 2011-12, however, indicate healthy sales growth.
The central government’s deficit indicators are under duress due to higher subsidies and lower tax collections. Fiscal slippages during 2011-12 may complicate the task of aggregate demand management. Fiscal reforms, including the Direct Tax Code and the Goods and Services Tax are, therefore, needed to contain deficits in 2012-13.
With a widening current account deficit (CAD), larger fiscal spending could affect growth and stability in the economy. The mounting revenue deficit is already putting fiscal position under strain and impacting the Government’s ability for capital spending. There is need for budgetary solutions to growing subsidy commitments and to rebalance public spending from consumption to investment, in order to enhance the potential growth rate of the economy.
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