Skip to main content

RBI Cuts growth forecast

RBI Cuts growth forecast
REPO RATES STAYS AT 6%, SLR REDUCED BY 50 BPS
NO SPACE LEFT FOR FISCAL STIMULUS,SAYS GOVERNOR
The Reserve Bank of India (RBI) kept its policy rates unchanged on Wednesday, revised its inflation forecast for the second half of the fiscal year, and lowered the growth forecast sharply, while asking the government not to be too ambitious with its fiscal stimulus package.
Five members of the six-member monetary policy committee (MPC), headed by RBI Governor Urjit Patel, voted for a pause. Ravindra Dholakia voted for a 25 basis point cut. Following the fourth bi-monthly monetary policy, the repo rate remained at 6 per cent. While continuing with its glide path of bringing down banks’ mandatory bond holdings, the central bank reduced the statutory liquidity ratio by 50 basis points to 19.5 per cent of the deposit base. The policy stance remained ‘neutral’.
One basis point is 0.01 per cent.Patel said in an interaction with the media that between the states and the Centre, there was hardly any space left for the fiscal stimulus that the government was contemplating. The general government fiscal deficit, or the combined deficit of the states and the Centre, is already in the region of 6 per cent, which is a loose fiscal stance.
“In other words, we should be very cautious, lest fiscal actions undercut macro-economic stability,” Patel said.The central bank in its policy statement said it now expected inflation in the second half of the present fiscal year to range between 4.2 per cent and 4.6 per cent, up from its previous estimate of 4.0-4.5 per cent.The inflation forecast pushed 10-year bond yields up by 6 basis points to close at 6.70 per cent.
“We will basically have to wait and watch on how the evolution of inflation takes place over the next six to seven months in terms of what happens and has been projected. But as you know, inflation has been volatile. Within two months it increased by 2 percentage points. So, we will see what happens,” Patel said in the post-policy conference.Food prices could become a concern going forward as kharif sowing has been lower than last year, while prices of pulses have started stabilising against their lows in the recent past.
The rise in crude oil prices may push up retail inflation, but excluding food and fuel, there has also been a broad-based increase in the Consumer Price Index-based inflation, the RBI noted. Furthermore, implementation of farm debt waivers may compromise the quality of public spending and that will be inflationary. The central bank had also not yet taken into account the states’ possible rise in wages and allowances, which, if on a par with the Centre, could push up inflation by another 100 basis points, the policy document said. “With this growth and inflation profile in place to guide future policy actions for the rest of this year, any further monetary accommodation will be contingent upon growth not holding up or inflation undershooting,” said Gaurav Kapur, chief economist of IndusInd Bank.
We believe that the revision in the inflation forecast is a bit premature,” said Abheek Barua, chief economist of HDFC Bank, adding inflation could fall below the RBI’s forecast. “If indeed the growth momentum continues to remain weak, the case for one more rate cut could still materialise.”
Growth concerns
The central bank revised its gross value-added (GVA) growth forecast to 6.7 per cent for the current fiscal year from 7.3 per cent earlier. “The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates,” the policy statement said.
Having said that, the central bank hoped that the “teething problems linked to the GST and bandwidth constraints may be resolved relatively soon, allowing growth to accelerate in the second half of the fiscal year. But input costs had risen faster than expected and companies’ pricing power had fallen, which could affect the growth numbers, the RBI said.
“The MPC (monetary policy committee) was of the view that various structural reforms introduced in the recent period would likely be growth-augmenting over the medium- to long-term by improving the business environment, enhancing transparency and increasing formalisation of the economy,” the policy statement said.
Patel said many of the high-frequency indicators suggested that there was an uptick in growth. The Index of Industrial Production numbers released on Tuesday showed growth at 4.9 per cent. In the second quarter, the services sector had been showing a healthy growth rate, and that there was a possibility that a cyclical upturn would happen in the next two quarters, the RBI governor said.
The MPC reiterated that it was imperative “to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities are utilised and the requirements of new capacity open up to be financed”. Recapitalising public sector banks was vital for credit flows.
The policy statement also prescribed a number of measures to revive growth. It said there should be a “concerted drive to close the severe infrastructure gap; restarting stalled investment projects, particularly in the public sector; enhancing ease of doing business, including by further simplification of the GST; and ensuring faster roll-out of the affordable housing programme with time-bound single-window clearances and rationalisation of excessively high stamp duties by states”.
According to Patel, sectors with good creditworthiness will see an investment pick-up as capacity utilisation rises and that should start reviving private sector growth.
The Business Standard, New Delhi, 5th October 2017

Comments

Popular posts from this blog

At 18%, GST Rate to be Less Taxing for Most Goods

About 70% of all goods and some consumer durables likely to cost less

A number of goods such as cosmetics, shaving creams, shampoo, toothpaste, soap, plastics, paints and some consumer durables could become cheaper under the proposed goods and services tax (GST) regime as most items are likely to be subject to the rate of 18% rather than the higher one of 28%.

India is likely to rely on the effective tax rate currently applicable on a commodity to get a fix on the GST slab, said a government official, allowing most goods to make it to the lower bracket.

For instance, if an item comes within the 12% excise slab but the effective tax is 8% due to abatement, then the latter will be considered for GST fitment.

Going by this formulation, about 70% of all goods could fall in the 18% bracket.

The GST Council has finalised a four-tier tax structure of 5%, 12%, 18% and 28% but has left room for the highest slab to be pegged at 40%. A committee of officials will work out the fitment and the council…

Firms with sales below Rs.50 crore out of ambit

The tax department has reiterated that the PoEM rules, which require foreign firms to pay taxes in India if the effective control is here, will not apply to companies withaturnover of Rs.50 crore or less inafinancial year. Last month, the tax department had come out with the longawaited Place of Effective Management (PoEM) rules, which require foreign companies in India and Indian firms with overseas subsidiaries to pay local taxes if their businesses are effectively controlled by Indians. Then the rules did not setathreshold above which they were to apply. However, the accompanying press release states that the rules will not apply to companies withaturnover of up to Rs.50 crore inayear. That created confusion whether the threshold will be adhered to. Inacircular to clarify things, the Central Board of Direct Taxes (CBDT) said the provision "shall not apply toacompany havingaturnover or gross receipts of ~50 crore or less inafinancial year".

PoEM rules essentially target shell …