A scheduled data release on economic growth and an RBI’s bi-monthly monetary review are not particularly upbeat on their implications for the macroeconomy. Yet, neither a lower GDP growth estimate nor the absence of a policy rate cut is seen as a negative.
There is an underlying current of optimism in both. A 5.5 per cent growth in the first half of the current year clearly indicates that the days of a sub-5 per cent annual growth are finally getting over. Although the RBI did not cut policy rates, it has indicated that there could be one even ahead of the next (February, 2015) policy statement.
The Central Statistical Office (CSO) released the GDP growth data for the second quarter of the current year just days before the RBI’s scheduled fifth bi-monthly monetary policy statement on December 2.
The significance of the second quarter data release is further enhanced because along with the GDP figures for the first quarter already available it is possible to get a clearer idea of the economy’s growth trajectory during the current year.
According to the CSO, the economy grew by 5.3 per cent during the second quarter. With the first quarter growth having been estimated at 5.7 per cent, the half yearly GDP growth rate has come at 5.5 per cent.
Interestingly, most annual projections, including that of RBI, are around this figure.
The RBI’s views on economic growth obviously matter even though it is its monetary actions — whether there is a rate cut or not — that invariably hog all the attention.
That is a pity because the RBI’s justification of its rate action (or inaction) is in essence an analysis of the economy’s growth prospects and why (as it did this time again) it holding back a rate cut is in the larger interests of the economy at this juncture.Time not ripe
As RBI Governor Raghuram Rajan reiterated, sustained growth is possible only when policymakers have acquired a firmer grip over inflation. Despite the sharp fall in inflation — retail and wholesale — the time is not ripe for a rate cut. In RBI’s words, if the current inflation momentum and changes in inflation expectations continue and fiscal developments are encouraging, a change in the monetary policy stance is likely next year, including outside the policy review.
The next bi-monthly policy statement — the sixth — is due on February 2. It will be the last before the first full fledged budget of the NDA government. That would be the time when inflation as well as growth targets would be evaluated in the light of developments in the next few weeks.
Getting back to the CSO’s data, the second quarter GDP growth at 5.3 per cent, though lower than the 5.7 per cent in the first quarter (April-June), is above what most analysts had expected.
The big picture, of course, is to be seen in the annual growth rate projection — whether the economy is finally coming out of the trough into which it had fallen. Over the past two years, economic growth was below 5 per cent. It is now almost certain that the growth rate during this year will be well above 5 per cent, closer perhaps to 5 .5 per cent than to 6 per cent.
An analysis of the constituents that make up the data will be useful. Agriculture (3.2 per cent) and community, social and administrative services (9.6 per cent) were the main growth drivers during the second quarter. During the entire first half, agriculture growth has been of the order of 3.5 per cent, particularly creditable because it has come on top of a base impact of 4.5 per cent last year.
It is not clear from the data whether the impact of insufficient monsoons has been factored in. Community, social and administrative services capture government spending and has, therefore, relevance for calculating the fiscal deficit.
The biggest negative has been manufacturing, a tiny 0.1 per cent increase, not at all surprising in the light of the monthly IIP numbers. The fall in manufacturing has been cited in support of an immediate rate to ease interest rates on loans to industry.
However, the central theme of the central bank’s dissertation of the inflation outlook is one of muted optimism. As mentioned earlier, a rate cut is possible even ahead of the next policy date. This, of course, is subject to so many caveats but the RBI’s message could not have been clearer.
The central bank has stuck to its earlier 5.5 per cent GDP forecast for the current year.
Here again, there are several downside risks. However, in line with its inflation forecasts, the RBI’s pronouncements are more upbeat than in the recent past. For both inflation and growth, 2015-16 ought to be even better.