With economic recovery firmly under way, the Reserve Bank of India (RBI) has trained its guns on containing inflation and providing a supportive climate for sustaining growth.
While the central bank dwelt extensively on the price situation, it raised the projection for inflation, measured by the wholesale price index (WPI), for March 2011 by just 50 basis points to six per cent.
RBI Governor D Subbarao is obviously deriving comfort from the better performance of the southwest monsoon till date and subdued growth in the global economy, which may keep commodity prices in check. Slowing of the Chinese economy, which laps up commodities in huge quantities, is expected to help moderate global inflationary pressures in the coming months.
RBI also said unutilised global capacity in several sectors would soften prices of imports and put downward pressure on import substitutes.
However, many economists are not ready to go along with RBI’s revised inflation estimates.
"RBI has understated the inflationary pressure by projecting six per cent inflation at the end of the year. If RBI has to bring down inflation from 12 per cent to six per cent, then it will have to raise rates more aggressively," said JP Morgan’s Chief Economist, Jahangir Aziz. He said the growth projection of 8.5 per cent looked reasonable.
Seconding Aziz’s view, Madan Sabnavis, chief economist with rating agency CARE, said inflation would be seven to eight per cent at the end of the year, as the fuel price rise and demand-pull pressures on the non-food side materialise fully.
Sonal Verma, economist with Nomura Fin Services and Securities, said WPI inflation had already peaked and with global commodity prices broadly stable, input cost pressures should ease. But RBI’s estimate (of six per cent) looks optimistic. Nomura says the WPI inflation will be seven per cent by March 2011.
RBI said in the domestic arena, developments on the inflation front were worrisome. WPI inflation has been in double digits since February. So has that in primary food articles, despite some moderation.
Between November 2009 and June 2010, non-food inflation rose from zero to 10.6 per cent and non-food manufactured inflation rose from zero to 7.3 per cent. Significantly, non-food items contributed over 70 per cent to WPI inflation in June. It clearly showed that inflation had become general. Inflation in terms of all four consumer price indices remains in double digits, notwithstanding some decline in recent months.
Going forward, the outlook on inflation will be shaped by the monsoon performance for the remaining period. The other aspect is potential build-up in demand-side pressures.
Cheer on growth
RBI, cautious about prices, looked upbeat on the growth story. It raised the growth estimate for the year (2010-11) to 8.5 per cent from its earlier estimate of eight per cent with upward bias, made in its April policy statement.
This upward revision is primarily based on better industrial production and its favourable impact on the services sector, while giving due consideration to the global scenario.
Subbarao said the macroeconomic developments in India are contrarian to the global trend. We have recovered faster, but our inflation rate has also been higher. The recovery process has consolidated and become more broad-based from April. A big ‘known unknown’ in April was the outlook on the monsoon. That has since become a ‘known known’, in the sense that rainfall so far has been better than during last year. The crop-wise area sown and the distribution of rainfall offer scope for cautious optimism on agriculture. RBI said better farm sector prospects should lead to a pick-up in rural demand. This should give further momentum to the performance of the industrial sector, which has been growing firmly.
The strength of the recovery is also reflected in the sales and profitability growth of the corporate sector with more investment intentions being translated into action across a range of sectors. While domestic drivers of growth are robust, any slowing in global recovery will affect all emerging market economies, including India.