PM plays down Moody's forecast

Prime Minister Manmohan Singh, talking to reporters at Rashtrapati Bhavan, where he was attending the swearing-in ceremony of Vice-President Hamid Ansari, today played down the Moody’s forecast of 5.5 per cent gross domestic product (GDP) growth in the current financial year. He expressed hope that it would be better than the 6.5 per cent recorded in 2011-12.

Earlier this week, Moody’s Analytics, the research unit of ratings agency Moody’s Investors Service, had cut India’s growth forecast to 5.5 per cent, citing a lack action from the government or the Reserve Bank, despite a broad-based slowdown and a poor monsoon.

The government is already under pressure of a looming ratings downgrade to junk, following the Standard & Poor’s April 25 revision of the long-term rating outlook of the country to negative from stable.

Asked to comment on Moody’s analysis of the Indian economy, Singh said: “It is a cause of concern, but one should not draw unwarranted conclusions.”

“The fundamentals of the Indian economy are strong. Investments and savings are among the highest in the world. I am hopeful we will do even better than the 6.5 per cent growth performance of last year,” he added.

Moody’s Analytics Senior Economist Glenn Levine had said: “There has been little policy response from either the Reserve Bank of India or the government and, with global uncertainty dragging on, we see nothing on the horizon to lift the economy from its funk.”

While releasing its outlook on India’s investment scenario, S&P Credit Analyst Takahira Ogawa had said in April: “The outlook revision reflects our view of at least one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political set-up.”

The government, on its part, has been trying to improve its record on the reform front since then, but it is yet to make a headway.

Keen to prevent a downgrade of India’s sovereign rating by S&P, which could trigger an exodus of foreign investors, Singh had told the Congress party last month that there was no option but to raise diesel prices by at least Rs 5 a litre after the Presidential election.

Prime Minister’s Economic Advisory Council Chairman C Rangarajan had also said yesterday that the overall growth rate for the current year could be slightly better than last year’s 6.5 per cent. He said industrial production should pick up in the second half of the year and agriculture activities’ contribution to GDP should also be higher.

Cutting fuel subsidy can cause 2.6% spike in inflation: RBI

New Delhi, August 6: Reserve Bank ofIndiaGovernor D Subbarao has said the proposed elimination of fuel subsidy can lead to a massive 2.6% spike in inflation, an assessment that makes it even more difficult for the government to bite the bullet.

While a hike in diesel and cooking gas prices may be long overdue, the government is hard-pressed to contain inflation ahead of crucial assembly polls inGujaratand Himachal Pradesh later this year. A hike in the price of diesel, which is used as fuel for transporting goods, immediately leads to a spiral in the wider economy.

Subbarao, who shared his assessment with Parliament’s standing committee on finance on Monday, pitched for a healthy single-digit growth coupled with low inflation. The RBI governor‘s approach was in stark contrast to the former economic advisor to the government, Kaushik Basu, who has said that the country can settle for an 11% inflation in the event of 10% growth. “The ideal situation would be a 7% growth and 5% inflation,” the RBI governor told the panel, as he appeared to emphasise on the need to contain price rise.

However, the government is not completely convinced with the central bank‘s approach. A recent note from the government to the parliamentary panel expressed its disquiet over the central bank’s decision to keep money supply tight. At the meeting of the standing committee, the panel’s chairman, Yashwant Sinha, said there was a difference in the approach of the government and RBI. The high subsidy bill and lower tax revenue have resulted in the government’s fiscal projections for 2011-12 going awry. The fiscal deficit during the fiscal was 5.8%, wider than the initial target of 4.6%.

In his presentation before the panel, Subbarao said that while liquidity was not an issue there was lack of appetite for investment. He agreed that deficient monsoon, high fiscal deficit, food inflation, suppressed inflation and rising global commodity prices posed a major challenge to the government. According to a member of the standing committee, the governor conceded that there was a sharp decline in investments. “It has now gone into the negative territory,” said a member, who did not wish to be identified.

What is adding to the problem is the reluctance of the banks to pump funds into the economy. “The banks have large exposures in depressed sectors such as power, fertiliser, civil aviation and real estate. How long can the banks go on extending loans to these sectors,” asked a member, who participated in the deliberations. Members of the opposition parties on the panel said the risk-averse approach of the banks was hurting critical sectors that require large investments.