Point is to raise growth without
inflation (The Hindu)
Mains Paper 3: Economy
Prelims level: Monetary Policy Committee
Mains level: Role and performance of Monetary Policy Committee
- The Monetary Policy Committee (MPC) at its meeting on unanimously
resolved to keep the policy repo rate unchanged at 5.15 per cent.
- In line with market expectations, at its sixth and last bi-monthly for
the financial year, it was resolved that the accommodative stance would
continue to revive growth with the inflation rate at the targeted level of 4
per cent, +/- 2 per cent.
- The monetary policy has run its full course for the current fiscal with
a policy repo rate reduction by 110 basis points or bps (135 bps including
the February 2019 rate reduction).
- The Indian economy has been witnessing a weakening real economic growth
measured in terms of GDP at constant prices (base year 2011-12), with
accelerating retail inflation measured in terms of Consumer Price Index
- In the December 2019 print, retail inflation was at 7.35 per cent on a
year-on-year basis with a high food inflation component of 12.2 per cent.
- Core inflation (excluding food and fuel) was higher at 3.8 per cent in
December 2019 than that of 3.4 per cent in October 2019. Household inflation
expectations, as evident from the January 2020 round of the RBI survey,
declined by 60 bps and 70 basis points, respectively, for a three-month and
- The inflation outlook in the near future appears to be gloomy, as the
MPC in its resolution has revised the retail inflation projection upwards to
6.5 per cent for Q4 of 2019-20 and 5-5.4 per cent in H1 of 2020-21.
- This has been much higher than the target rate of average 4 per cent.
- The upward revision of inflation outlook stems from the rise in
non-vegetable food items (particularly milk, due to a rise in input cost and
pulses on account of shortfall in kharif production); upward pressure on
fuel prices (due to the uncertain global economic outlook and geopolitical
tensions in the Middle-East); increase in input cost for services; and the
announcement of an increase in customs duties on items of retail consumption
in the Union Budget for 2020-21.
- Domestic economic activity measured in terms of real GDP for 2019-20 has
been estimated at 5 per cent, according to data from the National
Statistical Office (NSO).
- In this regard, it is important to mention that real economic growth has
been continuously slowing down since 2016-17.
- After recording a growth rate of 8.3 per cent in 2016-17, the economy
decelerated to 7 per cent, 6.1 per cent and 5.0 per cent in 2017-18, 2018-19
and 2019-20, respectively.
- Capacity utilisation in the manufacturing sector as per the RBI’s Order
Books, Inventory and Capacity Utilisation Survey (OBICUS) declined to 69.1
per cent in Q2 from 73.6 per cent in Q1.
- The state of the economy remains weak, with a continued negative output
gap. The Budget has assumed that in 2020-21, the real GDP growth will be in
the range of 6-6.5 per cent.
- However, the MPC’s growth outlook for 2020-21 is at 6 per cent — 5.5-6
per cent in H1 and 6.2 per cent in Q3 of 2020-21.
Revival of growth:
- Against this backdrop, it is important to mention that a smooth running
of the economy is needed for a sustainable level of non-inflationary growth.
- This requires moving to a higher growth trajectory, with a retail
inflation rate of average 4 per cent.
- The Economic Survey for 2019-20 has mentioned that the deceleration in
GDP growth has to be seen in the context of a “slowing cycle of growth with
the financial sector acting as a drag on the real sector”. \
- The Survey further mentions that a resurgence in growth is expected to
begin in H2 of 2019-20.
- Simply speaking, conceptually, economic growth is critically dependent
upon the investment rate (gross capital formation as a proportion of the
GDP) limited by the savings rate (the ratio of gross savings to the gross
national disposable income or GNDI).
- However, this could not be sustained further because of the weakening
consumption demand and, more importantly, investment demand.
- The investment demand measured in terms of the increase in gross fixed
capital formation (GFCF) has been recorded at 2.3 per cent as against 9.8
per cent in 2018-19.
- Economic growth could also be revived with consumption demand
originating from the government, but this cannot be sustained as
consumption-led growth is not tenable in the long-run.
- The transmission of the monetary policy to the real sector through lower
bank lending rates has been weak so far, as the lending rate declined only
by 55 bps on fresh loans as against the 135 bps reduction in policy repo
- The banks and the private sector are also partners of growth, and have
to be proactively engaged in the process of revival. Otherwise,
non-inflationary growth will remain a far cry.