The Reserve Bank of India has pegged growth projection for 2016-17 to 7.6 per cent. Professional forecasters surveyed by the Reserve Bank during March 2016 expected output growth to pick up gradually from 7.3 per cent in fourth quarter of FY16 to 7.7 per cent in fourth quarter of FY17, almost entirely on account of recovery in agriculture and allied activities. Consumer Price Index (CPI) Inflation has hovered around 5 per cent. RBI said going forward, CPI inflation is expected to decelerate modestly and remain around 5 per cent during 2016-17 with small inter-quarter variations. However, the growth and inflation projections could face 5 major risks, the central bank has said. These include:
Implementation of the Seventh Pay Commission Award: The implementation of the Central Pay Commission’s recommendations could impact inflation and growth through direct impact of the proposed increase in the house rent allowance (HRA), indirect effects operating through consumption to aggregate demand and inflation expectations channel. Assuming that the Government implements the Commission’s recommendations by the second quarter of 2016-17, CPI inflation could be, on average, 100-150 bps higher than the baseline in 2016-17 and 2017-18
Weaker Global Growth: Recent developments point towards a weakening of global economic activity. If it materialises, unsettled financial markets could generate spillovers to the broader global economy. A widening of the slack in the global economy by 1 percentage point over the baseline will result in growth in India turning out to be 20-40 bps below the baseline. Inflation would also be lower by 10-20 bps as lower demand would result in a fall in global commodity prices
Exchange Rate: While the macroeconomic fundamentals of Indian economy remain strong, volatility in the foreign exchange market on account of external developments can impact both growth and inflation trajectories. A 5 per cent depreciation relative to the baseline assumption could lead to inflation turning up by 10-15 bps above the baseline forecast for 2016-17 and real growth by around 5-10 bps above the baseline.
Deficient Monsoon: El Nino conditions continue to pose a risk to the south-west monsoon. About 90 per cent of all El Nino years have led to below normal rainfall and 65 per cent of El Nino years have brought droughts. Assuming a deficiency of 20 per cent in the monsoon, lower agriculture output could lower the overall growth by around 40 bps in 2016-17. Food prices could consequently increase, leading to inflation rising above the baseline by 80-100 bps in 2016-17, even assuming effective government policies relating to food stocks, procurement and minimum support prices (MSPs).
Rise in Crude Oil Prices: There is considerable amount of uncertainty on oil prices in view of political forces impacting oil market dynamics. Supply disruptions from geo-political developments could lead to spikes in oil prices, while weaker global demand could push prices further down. If oil prices rise to around $50 per barrel, and assuming full pass-through to domestic fuel prices, inflation could be higher by 40-60 bps and growth could be weaker by 20-30 bps. On the other hand, a reduction in crude oil prices to around $20 per barrel could reduce inflation by 80-120 bps, while boosting real growth by 40-60 bps.
source - financial express.
Implementation of the Seventh Pay Commission Award: The implementation of the Central Pay Commission’s recommendations could impact inflation and growth through direct impact of the proposed increase in the house rent allowance (HRA), indirect effects operating through consumption to aggregate demand and inflation expectations channel. Assuming that the Government implements the Commission’s recommendations by the second quarter of 2016-17, CPI inflation could be, on average, 100-150 bps higher than the baseline in 2016-17 and 2017-18
Weaker Global Growth: Recent developments point towards a weakening of global economic activity. If it materialises, unsettled financial markets could generate spillovers to the broader global economy. A widening of the slack in the global economy by 1 percentage point over the baseline will result in growth in India turning out to be 20-40 bps below the baseline. Inflation would also be lower by 10-20 bps as lower demand would result in a fall in global commodity prices
Exchange Rate: While the macroeconomic fundamentals of Indian economy remain strong, volatility in the foreign exchange market on account of external developments can impact both growth and inflation trajectories. A 5 per cent depreciation relative to the baseline assumption could lead to inflation turning up by 10-15 bps above the baseline forecast for 2016-17 and real growth by around 5-10 bps above the baseline.
Deficient Monsoon: El Nino conditions continue to pose a risk to the south-west monsoon. About 90 per cent of all El Nino years have led to below normal rainfall and 65 per cent of El Nino years have brought droughts. Assuming a deficiency of 20 per cent in the monsoon, lower agriculture output could lower the overall growth by around 40 bps in 2016-17. Food prices could consequently increase, leading to inflation rising above the baseline by 80-100 bps in 2016-17, even assuming effective government policies relating to food stocks, procurement and minimum support prices (MSPs).
Rise in Crude Oil Prices: There is considerable amount of uncertainty on oil prices in view of political forces impacting oil market dynamics. Supply disruptions from geo-political developments could lead to spikes in oil prices, while weaker global demand could push prices further down. If oil prices rise to around $50 per barrel, and assuming full pass-through to domestic fuel prices, inflation could be higher by 40-60 bps and growth could be weaker by 20-30 bps. On the other hand, a reduction in crude oil prices to around $20 per barrel could reduce inflation by 80-120 bps, while boosting real growth by 40-60 bps.
source - financial express.
