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RBI set to pare growth projection: but to what extent?

BS Banking Bureau in Mumbai

Nobody is quite sure if Reserve Bank of India Governor Bimal Jalan's Monetary & Credit Policy next week will spring any surprise on the twin fronts of rate cuts and structural recast.

However, it's fairly certain that the RBI will signal a scaling down of its national income growth estimate for 2002-03 from the earlier forecast of 6-6.5 per cent. Everybody's guess is to what extent the projection will be cut.

A section of the economists feel that the RBI may scale this projection as sharply as by one a half percentage point to 5 per cent while others feel the central bank may opt for a conservative stance and peg it between 5.5 and 6 per cent.

Yet another school said it could be between 5 and 5.5 per cent. In its annual report, released in August, RBI had said: "...there is a strong possibility that the growth rate of 6 to 6.5 per cent projected in the annual Monetary and Credit Policy statement (April 2002), which was based on the assumption of normal monsoon, will not be realised. On the basis of current indications about the monsoon, the growth rate is likely to be lower than projected earlier."

It also made it clear that a re-assessment of the projected growth rate for the current year would be attempted in the mid-term review, "by which time reliable information regarding the effects of drought on the agricultural and industrial output will be available".

Indian GDP registered a 5.4 per cent rise in 2001-02. The annual report also said that insufficient monsoon may adversely affect the incipient industrial recovery "unless countervailing and timely measures are put in place to accelerate the pace of industrial investment and economic reforms."

Industrial output from April to August was 4.9 per cent higher than a year earlier, when it was showing just 2.4 per cent growth.

Most forecasts suggest that the year could end with no more than 5 per cent growth. The Centre for Monitoring Indian Economy has forecast the most pessimistic scenario of 3 per cent growth. It had said last week that it expected 3.5 per cent less output from the Indian farm sector in the current financial year compared with last year's growth of 5.7 per cent.

Credit rating agency Crisil has pegged the growth in gross domestic product for the current fiscal at 5-5.2 per cent. It expects the second half of the current fiscal to continue in the same vein with the "mild and somewhat selective recovery" of the first half.

According to the Crisil Centre for Economic Research's, GDP growth will be coupled with a notching up of the average inflation rate. The slippage in fiscal deficit will be relatively moderate.

This along with an easy monetary policy is likely to keep a lid on interest rates. Most analysts believe that the final number could be anywhere between 4.5 per cent and 5.5 per cent, depending on agricultural production.

In order to create an environment where the effect of poor monsoons is minimised, the RBI may cut the rates. The low inflation rate is one factor which can encourage the central bank to take the plunge shaking off its wait and watch policy, analysts said.

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