Macroeconomic and Monetary Developments : Third Quarter Review 2012-13
-Announced on 28th January 2013 by RBI
The Reserve Bank of India has released the Macroeconomic and Monetary Developments : Third Quarter Review 2012-13 . The document serves as a backdrop to the SThird Quarter Review of Monetary Policy Statement 2012-13 to be announced on January 29, 2013.
Balance of macroeconomic risks suggests monetary policy needs to be calibrated in addressing growth risks as inflation turns sticky
Growth in 2012-13 is likely to fall below the Reserve Bank’s baseline projection of 5.8 per cent. However, output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand.
Inflation is likely to moderate below the Reserve Bank’s baseline projection of 7.5 per cent. However, suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn sticky.
Various surveys show that business confidence remains subdued. Survey shows that forecasters outside the Reserve Bank anticipate growth to recover from 5.5 per cent in 2012-13 to 6.5 per cent in 2013-14. Average WPI inflation is expected to moderate from 7.5 per cent in 2012-13 to 7.0 per cent in 2013-14.
Global Economic Conditions
Unconventional monetary policies reduce stress, but risks remain ahead
Fiscal risks are likely to keep global recovery muted in 2013. While the immediate risk of the fiscal cliff in the US has been averted, risks to global growth emanating from euro area remain significant. There are some signs of growth bottoming out in Emerging Market and Developing Economies (EMDEs).
Global inflation scenario may stay benign as demand in advanced economies (AEs) remains weak. Improved supply prospects in commodities like oil and food are likely to restrain commodity price pressures. However, upside risks persist, with possible recovery in EMDEs and large quantitative easing in AEs.
Growth slowdown continues, revival may take some more time
Growth slowdown in India continues with growth remaining below potential for the fifth successive quarter. Policy initiatives of the government are yet to show up fully or definitively in data. Revival may take some more time.
Rabi crop is expected to be normal despite deficient rains, but is unlikely to fully compensate for kharif deficiency. Sowing under rabi crop has been broadly the same as the level in the previous year.
Weak industrial performance is likely to persist. Subdued external demand and lack of reliable power supply amidst coal shortages are constraining capacity utilisation. Lead indicators of service sector and the Reserve Bank’s Service Sector Composite Indicator signal moderation.
The Reserve Banks’ Order Books, Inventory and Capacity Utilisation Survey shows capacity utilisation increased marginally in Q2 of 2012-13. On a sequential basis, new orders moderated in Q2 of 2012-13.
Improvement in investment climate is a prerequisite for economic recovery
Demand conditions remained tepid, with private consumption continuing to decelerate and with investment yet to recover.
Investment intentions in new projects improved marginally in Q2 of 2012-13, but investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures.
Sales growth moderated further in Q2 of 2012-13 to its lowest level in three years, but net profit growth improved markedly. Early results for Q3 of 2012-13 indicate continuation of the trend of sluggish sales.
Quality of fiscal adjustment remains a concern, even as fiscal risks have reduced in 2012-13. Government is working towards achieving revised fiscal deficit target of 5.3 per cent of GDP by restricting both plan and non-plan expenditure during the last quarter of the year, even as significant shortfall in tax revenue is likely.
Increased public investment to crowd in private investment along with removal of structural impediments that is slowing private investment is needed to pull the economy out of the current slowdown.
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