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7 Things to learn from RBI’s macro-economic outlook
Most people look out for the Reserve Bank of India’s monetary policy review for two reasons: A) To know if their loans are likely to get cheaper B) To understand its impact on their stock investments. A small bunch of people go beyond the repo rate announcements—to the detailed policy report. We fall in that category. And on the basis of our reading, here are some important takeaways from the RBI’s policy review document about the economy.
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Monsoon and agriculture:
Dark clouds may make the weather gloomy, but it seems to be the bright spot in the economy. “A normal and well-distributed south-west monsoon for the second consecutive year has brightened the prospects of agricultural and allied activities and rural demand,” the RBI’s policy statement reads. Currently, 84% of the country received normal or even excess rainfall this monsoon. Not just that, even the agriculture output is expected to shoot up with record high sowing of most crops. This could mean higher incomes in rural India. This has the potential to push up economic activity and growth.
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Manufacturing output stumbles:
The agriculture sector may be shining, but industrial output seems to have gone off the growth path. But it’s important to look at the four key segments of industrial output—energy production, consumer durables, capital goods, and consumer non-durables. Demand, and thus production, of energy products like electricity, coal and oil has been poor. All this affected the mining sector too. The other two segments – consumer durables and capital goods – too witnessed falls in outputs. But here’s the worrying factor: companies seem to be less optimistic about demand. So output could remain weak in the days to come too.
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Rural demand is stronger:
The industrial output data reflects that urban demand and investments both remain weak. The only good news in this section is the increase in demand and output of consumer non-durables. This shows that rural demand seems to be strong, according to the RBI’s document. Even auto data suggests the same—at a time when sales of four-wheelers were weak, two-wheeler sales continued to grow for 3 consecutive months, the RBI report said.
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Services industry better:
The service sector seems to be in a better condition. Almost all sectors in the services industry seem to have witnessed growth in one form or the other like: an increase in freight carriage; higher voice and data usage by telecom customers; increase in air traffic, and higher steel consumption. The only blip in the data is the fall in four-wheeler sales in June and fall in cement production. Despite that, the Purchase Managers’ Index (PMI) data for Services suggests that the industry is expanding, unlike the manufacturing sector.
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Mixed inflation data:
On a year-on-year basis, inflation has been falling. However, prices have risen on a month-on-month basis. This is especially for food items like tomatoes, onions and milk. Of course, the various pre-GST sales slowed this rise. However, other sectors like telecoms, education, healthcare and even retail are seeing slow inflation. That said, people expect inflation to pick up in the next 3-12 months, as per the RBI’s survey.
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Weakening trade:
India’s exports are falling while imports are rising. “As import growth continued to outpace export growth, the trade deficit at $40.1 billion in Q1 was more than double its level a year ago,” as per the RBI policy review. However, foreign direct investments doubled in April-May 2017 compared to a year ago. Foreign portfolio investments too poured in. This can help pay for the trade deficit—when imports exceed exports and the country owes money.
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The worries ahead:
The RBI is worried about the economy, especially because the outlook for investments seems negative. The bad debt in the banking system could stop new investments. Real estate too is undergoing regulatory changes, which could lead to slower growth. However, the positive effects of the Goods and Service Tax (GST) could limit the damage and encourage investments.
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100
The RBI is unsure about future inflation. It worries that waivers of farm loans could lead to a widening of the fiscal deficit—the amount by which the government spends more than it earns. This, in turn, could push inflation up. Compounding this is the increase in salaries and allowances. If the states too announce hikes, it could push up inflation by 100 basis points (1%), according to the RBI’s monetary policy review. However, factors like a normal monsoon, stable commodity prices in international markets and fall in non-food, non-fuel inflation could help slow the growth in inflation.
