Near-term outlook of Indian economy fraught with risks: RBI
The Indian economy which has largely been subdued in the past few quarters and signs of a slowdown have cropped up, is likely to face several more risks in the near term, according to the Reserve Bank of India (RBI).
 
The RBI in its Monetary Policy Report, October 2019, has also said that a combination of domestic and global headwinds has depressed economic activity in the country.
 
"A combination of domestic and global headwinds has depressed economic activity, especially in terms of aggregate demand. The near-term outlook of the Indian economy is fraught with several risks," said the report.
 
It said that private consumption, which is the major support of economic activity, has started to slow down due to several reasons.
 
"In this context, the performance of large employment generating sectors such as automobile and real estate remains less than satisfactory. Recent measures initiated such as the sharp cut in corporate tax rates, stressed assets funds for the housing sector, infrastructure investment funds, implementation of a fully electronic GST refund system and funds for export guarantee would be helpful."
 
It also said that bank credit growth has slowed down and overall fund flows to the commercial sector have declined, due to risk aversion and a slowdown in demand. The monetary policy report, however, said that the the recent recapitalisation of public sector banks augurs well for improving credit flows, which are important for reviving private investment activity. 
 
"Meanwhile, global uncertainties have weakened investment activity at home. Further escalation of trade tensions could adversely impact export prospects, besides delaying the investment upturn," it said.
 
It also observed that the private corporate sector has not added new capacities off late even as existing capacity utilisation has risen close to its long-term average for several quarters. 
 
"The recent measures should help kickstart the capex cycle so that new capacities can come on stream and lead to the strengthening of domestic demand in the short-term while boosting the medium-term growth potential of the economy," it said.
 
On the industrial sector, the report said that the slowdown in industrial activity which begun in the second quarter of the financial year (FY) 2018-19 deepened further in first quarter of FY 2019-20.
 
"A sharp deceleration in manufacturing GVA (Gross Valued Added) in Q1, 2019-20 essentially reflected weaknesses in the organised sector. In terms of the index of industrial production (IIP), however, the performance of manufacturing improved in Q1, 2019-20 from the previous quarter. In July, manufacturing output accelerated further," the report added.
 
This comes as a major concern for the economy, after the economy grew at its slowest pace in over six years in the June quarter following a sharp deceleration in consumer demand and tepid investment. India's gross domestic product (GDP) grew 5 per cent in the first quarter of the FY 2019-20. The RBI also cut its GDP growth estimates for FY 2019-20 to 6.1 per cent, from earlier estimate of 6.9 per cent.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Ramesh Poapt

    1 week ago

    recent and forthcoming reforms will certainly improve
    overall growth in 2-3 quarters.

    RBI Cuts Repo Rate by 25bps to 5.15%, To Continue with Accommodative Stance to Revive Growth
    The Reserve Bank of India (RBI) on Friday reduced its repo rate (short-term lending) by 25 basis points (bps) to 5.15% in its fourth bi-monthly monetary policy review for 2019-20. The monetary policy committee (MPC) also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
     
    Following the move, the reverse repo rate (short-term borrowing) stands at 4.90%. Subsequently, the marginal standing facility (MSF) and the Bank Rate have also come down to 5.40%. 
     
    In a statement, RBI says, "The MPC notes that the negative output gap has widened further. While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum. With inflation expected to remain below target in the remaining period of 2019-20 and Q1 of 2020-21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate. It is in this context that the MPC decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target."
     
    RBI says, all members of the MPC voted to reduce the policy repo rate and to continue with the accommodative stance of monetary policy. MPC members Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das (RBI governor) voted to reduce the repo rate by 25bps. Dr Ravindra H Dholakia was the lone member to vote for reducing repo rate by 40bps. 
     
    This is the fifth consecutive reduction in a key lending rate by the MPC, which is expected to lower interest cost on automobile and home loans, thereby boosting sales.

    However, the RBI took note of the continued slowdown, thereby further lowering India's economic growth projection to 6.1% from 6.9% for FY20.

    "High frequency indicators suggest that services sector activity weakened in July-August. Indicators of rural demand, like tractor and motorcycles sales, contracted," the policy statement said, adding "Of underlying indicators of urban demand, passenger vehicle sales contracted in July-August... The sales of commercial vehicles, a key indicator for the transportation sector, contracted by double digits in July-August."

    Interestingly, the RBI acknowledged that previous monetary transmission has remained staggered and incomplete.

    "As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29bps," the central bank said.

    Nevertheless, the RBI maintained the accommodative stance stating that it will continue "as long as it is necessary to revive growth, while ensuring that inflation remains within the target".

    It was widely speculated that the RBI might change its stance to "neutral" due to the fiscal pressure expected out of the Centre's recent growth inducing measures.

    In terms of inflation, the apex bank slightly revised the CPI inflation projection upwards to 3.4% for second quarter (Q2) of 2019-20.

    On the government's recent measures to prop up growth, the RBI said, "While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum."

    "With inflation expected to remain below target in the remaining period of 2019-20 and Q1: 2020-21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate."

    At present, high GST tax rate, along with stagnant wages, farm distress and liquidity constraints have demoralised auto, home and capital goods buyers.

    Commenting on the monetary policy, Rajnish Kumar, chairman of State Bank of India (SBI) says that the 25bps rate cut coupled with an explicit policy acknowledgement of further rate cuts would ensure that fiscal and monetary policy work in tandem in arresting growth concerns. "The lowering of the GDP growth outlook to 6.1% for FY20 also reflects a realistic projection in view of the weak domestic demand, slowing global growth and the continuing trade tensions," he added.

    In the monetary policy, the RBI has also decided to extend the collateralised liquidity support on round the clock basis, which is expected to help banks extend the NEFT facility in a seamless and non-disruptive manner.

    The central bank has also allowed domestic banks to quote exchange rates on 24 hour basis heralds a paradigm shift for the Indian forex market.

    Mr Kumar from SBI, however, feels that how much competitive rates banks will be able to quote post Indian market hours on the 24-hour forex rates will be keenly watched going forward.
     
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    ramchandran vishwanathan

    2 weeks ago

    They have no clue on ground realities . I hope they go back to the drawing board and reflect on why RBI was formulated

    Big Crisis Coming in Next 6 Months, but India Will Rise This Time Too, Says Dr Subramanian Swamy
    "Over the next six months, there would be a big economic crisis in India as institutions are falling apart without any real efforts to hold them in place or to rectify the lingering issues. However, India has the potential and capabilities to overcome the crisis, if and when it strikes. What we need is a comprehensive macro model that will make every sector grow," says Dr Subramanian Swamy, senior leader of Bharatiya Janata Party (BJP) and current member of the Rajya Sabha. He was speaking in Mumbai at the publication of his latest book organised by Moneylife Foundation at the BSE.
     
    Earlier this week, Dr Swamy, a former Union minister for law and commerce, launched his latest book “RESET -- Regaining India’s Economic Legacy” in the presence of several dignitaries, including Chinese Consul General Tang Guocai, Prof R Vaidyanathan, BSE’s managing director (MD) Ashish Chauhan, many share brokers and traders, and several activists, among others.
     
    Upcoming Crisis
    Elaborating about the upcoming crisis, Dr Swamy referred to two big crises that India had faced, one in 1960 on food and other in 1990 on depleting foreign exchange. "From both these crises, India has come out shining. Post the economic reforms in 1991, our GDP rate started growing. During PV Narsimha Rao's tenure as prime Minister (PM), it was steady at 8%. However, after Mr Narsimha Rao, almost all governments adopted ad hoc economic policies. Dr Manmohan Singh was a good finance minister (FM) but a bad PM. This was because as FM, he had full support from Mr Rao." 
     
    "Even today, I have no doubt that India will rise again from the upcoming crisis like we did in the past. India has enough talent to rise in case of crisis. What we need is to encourage innovation and adopt a comprehensive model for growth," he added.
     
    With the book, Dr Swamy, the brilliant economist, who often get relegated due to his political activities, has made a return to his core. Dr Swamy studied mathematics at Delhi University and did his masters from the Indian Statistical Institute in Kolkata. His PhD in Economics was from Harvard University in 1965, under the guidance of Nobel Laureate Simon Kuznets.
     
    Had he continued in academics, Dr Swamy could perhaps been a candidate for the Nobel Prize. After all, he was among the four favourite students of Paul Samuelson and three of them have won the Nobel. 
     
    How GDP Can Grow 10%
    In his new book, Dr Swamy has detailed a blueprint for India, which he hopes can help the country grow at 10% per year, achieve self-reliance and full employment, among other economic benefits. The book also undertakes a nuanced analysis of the manner in which the highly prosperous Indian economy witnessed a long, accelerated decline due to persistent British imperialist aggression. 
     
    He says, "During the Congress party's 56 year rule, we have the socialist economic model. Problems is the Soviet socialist economic model that we tried to adopt never worked anywhere in the world. In fact, even the Soviet Union or Union of Soviet Socialist Republics (USSR) broke into separate countries after using the socialist economic model."
     
    "India is the only country that is predicted to fall apart but has never fallen apart. All other civilisations, like the Egypt, Greece, and Babylon among others disappeared because these were single-dimensional materialistic societies. India survived with built in balance in all our systems, society and culture. What we need today is to balance material prosperity with spiritual advancement," he added.    
     
    Empower Middle Class for Savings
    Speaking about the book, Dr Swamy says, “We need a new reset for our economy. We did not perform at macro growth level. India's middle class contribute significantly in our total savings. But these savings were not being used efficiently. We need to empower and encourage the middle class to take their contribution in India's total savings to 80%." 
     
    "Our growth rate has been declining. During 2011, when Dr Singh was the PM, we achieved our peak GDP growth rate. Today it is at around 5%. The country needs 10% growth for 10 years if we have to eliminate unemployment,” Dr Swamy says, adding "Today there is a big demand for Indian agriculture products from several countries, but we cannot take its advantage due to lack of a policy that encourage exports. Similarly, since labour cost is becoming expensive in China and India certainly can take advantage from this, like what Bangla Desh is doing. But again, there should have been a comprehensive policy to take advantage of such situations that is not there."
     
    Demonetisation, GST Were Hasty Decisions
    The senior leader also held the demonetisation and the hasty introduction of the goods and services tax (GST) responsible for the present economic crisis while saying that the government has not understood the policies required for higher growth. 
     
    He says, “When the new notes of Rs2,000 were brought in circulation during the demonetisation period, those we designed did not take into consideration the then existing slots in automated teller machines (ATMs). Only if they would have kept the size of the new notes similar to now demonetised Rs1000 note, we would have been successful in avoiding hardship to people.” 
     
    Even, when GST started, it was managed by GST Network (GSTN) that had several private companies as partners. 
     
    On 18 June 2017, Dr Swamy had demanded that the Government nationalise GSTN and sack the GSTN chairman for what he termed as a 'monumental fiasco' of being unable to activate GST by 1 July 2017. Earlier, in a letter to PM Narendra Modi in September 2016, Dr Swamy had requested a stay on operations of GSTN due to 'foreign control' in its shareholding. 
     
    Finally, in May last year, the GST Council decided to convert GSTN into a government-owned company by acquiring entire 51% of non-governmental institutions, like HDFC Bank, HDFC Ltd, ICICI Bank, NSE Strategic Investment Corp (10% each) and LIC Housing Finance Ltd (11%).
     
    Economists Are Afraid To Tell the Truth to the PM
    Later, responding to a question on economic issues as being handled by the present government, Dr Swamy says, the advisers and economists in the government "tell the prime minister only what he wants to hear,” leading to decisions like demonetisation, but he still has a “rapport with the public.”
     
    He says, "Today we need a system where we can have a policy for the short-run, medium-term and for the long-term. But it is not happening. I am afraid the economists that the government has recruited seem so frightened to tell the truth to the PM, while the PM himself is focused only on the micro-projects, like the Ujjwala scheme for distributing cooking gas to the poor women. Economy needs a multilateral approach for comprehensive growth across segments."
     
    "The way Mr Modi runs the government is that very few people can step out of the line. He should encourage people to tell him the facts or if something cannot be done. But I think he has not yet developed that temper," Dr Swamy added.
     
    Abolishing Income-tax is the Way to Go
    Earlier, during his speech, Dr Swamy also reiterated his demand for abolishing Income-tax (I-T) instead of lowering tax rates. According to him, taxpayers are often frightened of the tax officials and once you abolish this system, we can start on a clean slate where common people would save more without worrying about tax issues or the taxmen.
     
    “Abolishing I-T had been a very salutary (step); the middle class would have been very happy and they would have saved the money. The problem with corporate sector is that demand is low, so demand can only come when you empower the people, the people means income tax and that should have been abolished. Reducing corporate tax is of no use. Because they can only increase more supply but if there are no buyers, then there is no result in increasing supply,” he added.
     
    Significant Role in 1991 Economic Reforms
    Claiming a significant role in the 1991 economic reforms, Dr Swamy said he had drawn up their blueprint for economic reforms, while serving in the short-lived government of prime minister Chandra Shekhar before it collapsed and a general election saw the return of the Congress to power.
      
    “Ninety-five per cent of the credit should go to (PV) Narasimha Rao (who became the PM after the 1991 elections); the execution was by Dr Manmohan Singh (the then finance minister) and Montek Singh Ahluwalia (part of the team under Manmohan Singh) but in terms of conception, it was mine,” Dr Swamy said during a panel discussion following the release of his book.
     
    “It started with Chandra Shekhar and he was very much part of that,” maintained Dr Swamy, who served in the government as the commerce minister. He said he was approached in March 1991 for a copy of his blueprint which he agreed to hand over. He was then asked if he would join the Cabinet.
     
    “I said that I can’t do because it would meaning joining the Congress, a house owned by the Nehru-Gandhi family. I told Narasimha Rao that you too are just a tenant in this 'house',” Dr Swamy said, reiterating that it was Narasimha Rao’s 'political leadership’ that saw the reforms through as they broke new ground.
     
    For playing an important role and providing stable support on the upcoming Republic Day, PV Narasimha Rao should get a Bharat Ratna, Dr Swamy demanded.
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    COMMENTS

    Deepak Narain

    2 weeks ago

    Dr Swamy is a great Hindu leader and he is yet to get his due. Powerful people are scared of him because he is second to none on merits. May he get a long life and his due in the affairs of our beloved country.

    Gupta

    2 weeks ago

    This is the same Mr. Swamy who in an interview was asked how the govt will make up the loss of tax revenues if income tax is abolished and his answer was "we can tax the telecom sector, just spectrum charge can make up for it". Really... this is the person people are gunning for as a FM! Does he have any idea what is the entire revenue of the telecom sector. Govt has taxed them enough under all heads, there is zero incremental revenue there. Then he keeps talking about taxing all banking transactions. Again, he has no idea what kind of nuclear weapon that is to damage the economy permanently... it will push the whole economy towards cash. Savings will disappear into gold and real estate again. Honest people will also become dishonest. Investments will stop. God save this country if this guy gets any close to power. He claims to have been part of Chandrasekhar's govt and we all know where he took India in just a few months as PM. But we still want this "award winning economist" to be FM. God bless India!

    shadi katyal

    2 weeks ago

    The article doesn't show how and from where and when such Micro model is going to appear. While we seeing mass destruction of our banking system and no plans for any industry or employment, how he will bring 10% GDP increase.
    Sorry to be negative but when and if we will face the naked truth of our Govt only interest in religious and not economic field.
    What has Modi.1 term given to nation and bank scams are more than UPA govt.

    Sanjai

    2 weeks ago

    Brilliant! I appreciate your point of view.

    Ajay Sharma

    2 weeks ago

    I appreciate Moneylife's effort to publish a range of voices and viewpoints, but is this a puff piece??? "... Dr Swamy, the brilliant economist...Had he continued in academics, Dr Swamy could perhaps been a candidate for the Nobel Prize. " Who in the world is the author to say any of this?

    REPLY

    S Balakrishnan

    In Reply to Ajay Sharma 2 weeks ago

    He has published a paper with Paul Samuelson a Nobel. Probably his high point. The guy is always puffing himself. Unbelievably s d generally a sceptic has been taken in.
    The fact is economics and economists world over are at sea. So clueless that they are now coming around to the conventionally reviled idea of unlimited money printing. The man on the street knew this centuries back.
    Mistaken for a science which it isn't and can never be.
    So there's going to be nothing worthwhile in his book.
    Move on.

    Sucheta Dalal

    In Reply to Ajay Sharma 2 weeks ago

    You may want to do some homework about Dr Swamy's background.

    Ajay Sharma

    In Reply to Sucheta Dalal 2 weeks ago

    I am familiar with his research, or lack thereof, difficult as it was to find. With no concentrated area of research or innovative economic thought a Nobel in economics is impossible. Nobel laureates teach 100s of students throughout their career.

    He is no doubt a much needed public intellectual, but any measure of his brilliance or accomplishment must be accorded to him by his peers. For better or worse he is a political/economic outcast with little to show for his iconoclastic ideas till date.

    Ajay Sharma

    In Reply to Ajay Sharma 2 weeks ago

    My point was that the quoted sentences are heavily opinionated and not right (in my opinion) for Moneylife to report, unless clearly indicated as subjective comments. Thank you for responding.

    Suketu Shah

    In Reply to Ajay Sharma 2 weeks ago

    He wl ofcourse remain unpopular among politicians because he is honest.There are dubious leaders in his own party who donot like him only because he is honest.No one is hated more than one who speaks the truth.We strongly agree to didsagree on Dr Swamy.

    Suketu Shah

    2 weeks ago

    India wl rise out of upcoming crisis only if Dr Swamy is made FM,otherwise not.No one capable or good enough.

    P M Ravindran

    2 weeks ago

    I do admire Dr Swamy for his crusade against the ills in government. But I cannot agree with him on the demonetization and GST issues. Though both are apparently economic issues, they have greater dimensions- especially in curbing black money- and the result is there for everyone to see. In any case there cannot be a 'one solution fits all' kind of suggestion in managing the economy of a nation where the number of billionaires are rising as much as the number of people dying of hunger.

    His assessments of P V Narasimha Rao and Man Mohan Singh are bang on target.

    AAR

    2 weeks ago

    Abolishing Income Tax will create new problems.
    1. Promoters run companies will stop or reduce dividends and take out money through huge salary. Example: SUN TV Kalanidhi Maran\'s wife takes home 36 crores (old data) salary same as her CEO husband though she is not active in management. Who will stop them from increasing the salary to say full extent of the profit.
    SUN TV gets its outdoor shootings done through his brother Dayanidhi Maran company and are paid more than industry standard clear case of abusive related party transaction. Henceforth Maran can simply employ his brother\'s wife as VP marketing and give her whatever salary they desire. It would become Relatives party transaction.
    2. Easy for bribe taking. Example a builder wants to pay bribe to an IAS officer. Employ the IAS officer wife as VP this or that and pay her the bribe money as salary. Corporate tax is reduced because Nett profit is also reduced.
    3. An illegal mafia man doing business like gambling centre or prostitution ring can moonlight in dummy agricultural farm lands and white wash his money.
    4. Easy for enemy countries to pay it\'s spies or fund terrorists through NGO or global dummy companies.
    5. Income tax is not just about money collection, government can always print more currency. It is about keeping track of the money, position to ask question, maintaining trail which can be referred back in case of any issues. The trail keeps bad elements to operate in fear and in small size.
    5. Government should know what it\'s Citizens are doing. Let me give a big scenario. T Nagar police station limit in Madras is one of the richest bribe generating police station. Even small textile stores in T Nagar easily do business in crores and they pay the Inspector monthly around 1 crore. But the same inspector still employs his constables to collect 20 rupees from road side flower sellers, 10 rupees from beggars. Why? Because he wants to know who is doing what in his limit, he wants to be touch with his people, in his control, they should fear him and no activity can take place without his knowledge. A store gets robbed or a terrorists roams around, he can immediately talk to the people on the ground and gather information.
    6. Income Tax makes Citizens to question the actions of the government and be a part of it.
    7. Income Tax should be reduced not abolished. It should be made simple and easy.
    8. What needs to be reduced is worlds highest tax on Petrol and Diesel, Tolls on roads, GST.

    REPLY

    Gupta

    In Reply to AAR 2 weeks ago

    Mr. Swamy wont understand your well thought out arguments. He lives in his dreamland where he is the only economist in the world and everyone else just listens to him in awe !

    Dr. Sanjay Sawant Dessai

    In Reply to AAR 2 weeks ago

    agree

    Vasudevan

    In Reply to AAR 2 weeks ago

    What you said is right , income tax rate can be brought down , but abolisihing will be another tuglac idea like demonitisation

    AAR

    In Reply to Vasudevan 2 weeks ago

    Yes, Demonetization caused more harm to common man and legitimate cash based businesses than black money hoarders and terrorists.

    Gupta

    In Reply to AAR 2 weeks ago

    I can tell you that I know many businessman who had unaccounted cash who used to love Modi, but hate him after demo and that hatred remains as strong today. While it was indeed very badly implemented, it is a fact that honest people suffered a transitionary impact but the guys caught with cash had to pay huge commissions to agents to "manage" their cash. The cost of doing this was significant which is why they hate modi. If it was not much cost, they should love modi as their black money became white at low cost suddenly. 95% of businesses in India cheat on taxes if not higher. Ask them if they like Modi (not on a stage, ask privately!). You will know how much it hurt them...

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