Consumption to drive growth in fiscal 2018, says RBI in annual report

In its report, the central bank said farm loan waivers, implementation of housing allowance and the state pay commission recommendations could risk the trajectory of inflation.

The Reserve Bank of India said that favourable domestic factors such as a pick-up in discretionary consumer spending and robust government spending will quicken economic growth in the current fiscal.

The central bank’s annual report reiterated its forecast for gross value added (GVA, a measure of economic output) to grow at 7.3% in the current financial year compared to 6.3% in fiscal 2016-17.

However, at the same time, the report flagged risks such as over-leveraged corporate sector and stressed banking sector, because they could delay private investment demand revival. It also noted that farm loan waivers could add to upward pressures on inflation.

The central bank has projected Consumer Price Index-based inflation at 2.0-3.5% in the first half of fiscal 2018 and 3.5-4.5% in the second half.

The RBI said the announcements of farm loan waivers and the implementation of housing rent allowance, recommendations of the pay commission by states could lead to fiscal slippages and this poses an upside risk to the future trajectory of headline inflation.

Farm loan waivers are a major fiscal risk over the medium term, impacting credit discipline and vitiating credit culture, the report noted. As per initial estimates, the total loan waivers announced during 2017-18, till 2 August, amount to 0.4% of GDP, it added.

Interestingly, the mid-year Economic Survey prepared by the finance ministry had flagged farm loan waivers too.

The RBI report said that the central bank expected an increase in overall food inflation as unfavourable base effects set in from August 2017 even though inflation in pulses is seen to be muted. However, it added that with the likely progress of the south-west monsoon, food prices may remain moderate over the subsequent months as long as the seasonal price pressures of select vegetables such as tomatoes dissipate.

In the fiscal first quarter, CPI was around 2.2%. However, it rose to 2.36% in July, reducing the probability of any near-term interest rate cut, according to economists.

The RBI’s Monetary Policy Committee, which cut repo rate by 0.25 percentage points on 2 August, is mandated to keep CPI at 4%, the mid-point of a 2-6% target range.

“We expect the average inflation number for the current fiscal year to be around 4% with a downward bias. The impact of farm loan waiver will be felt over a period of 3-4 years and is not immediate. Moreover, not all states have waived the farm loans,” said D.K. Joshi, chief economist at Crisil Ltd.

“Globally subdued food prices and good monsoon domestically will keep a check on food inflation. Oil prices that were anticipated to move up significantly have not shown any such trend,” he added.

On the health of the banking sector, the report said that the RBI will continue to monitor and respond to asset quality issues.

It added that initiating the process of insolvency is expected to significantly improve the resolution of stressed assets, particularly where many banks are involved.

Following the RBI’s direction, banks have initiated proceedings under the Insolvency and Bankruptcy Code against 12 large borrowers, of which 11 cases have been admitted so far by the National Company Law Tribunal. The central bank has sent a second list of defaulters, directing banks to finalise a resolution before 13 December, failing which these borrowers will also be proceeded against for insolvency.

Apart from asset quality, implementation of Indian Accounting Standard (Ind-AS) and the Basel III framework will remain the areas of focus in the current financial year, RBI said.