India's growth rate to fall to 6%, will recover to 7.2% in 2022: World Bank - Pragnya IAS Academy - News Analysis.

India's growth rate to fall to 6%, will recover to 7.2% in 2022: World Bank.

In 2018-19, it stood at 6.8%, down from 7.2% in the 2017-18 financial year.

After a broad-based deceleration in the initial quarters of this fiscal year, India's growth rate is projected to fall to 6 per cent, the World Bank said on Sunday.
In 2018-19, the growth rate of the country stood at 6.9 per cent.
However, the bank in its latest edition of the South Asia Economic Focus said the country was expected to gradually recover to 6.9 per cent in 2021 and 7.2 per cent in 2022 as it assumed that the monetary stance would remain accommodative, given benign price dynamics.

The report, which has been released ahead of the annual meeting of the World Bank with the International Monetary Fund, noted India's economic growth decelerated for the second consecutive year.
In 2018-19, it stood at 6.8 per cent, down from 7.2 per cent in the 2017-18 financial year.
While industrial output growth increased to 6.9 per cent due to a pick-up in manufacturing and construction activities, the growth in agriculture and the services sector moderated to 2.9 and 7.5 per cent, respectively.
In the first quarter of 2019-20, the economy experienced a significant and broad-based growth deceleration with a sharp decline in private consumption on the demand side and the weakening of growth in both industry and services on the supply side, the report said.
Reflecting on the below-trend economic momentum and persistently low food prices, the headline inflation averaged 3.4 per cent in 2018-19 and remained well below the RBI's mid-range target of 4 per cent in the first half of 2019-2020. This allowed the RBI to ease monetary policy via a cumulative 135 basis point cut in the repo rate since January 2019 and shift the policy stance from neutral to accommodative, it said.
The World Bank report also noted that the current account deficit had widened to 2.1 per cent of the GDP in 2018-19 from 1.8 per cent a year before, mostly reflecting a deteriorating trade balance.
On the financing side, significant capital outflows in the first half of the current year were followed by a sharp reversal from October 2018 onwards and a build-up of international reserves to $411.9 billion at the end of the fiscal year.
Likewise, while the rupee initially lost ground against the $(12.1 per cent depreciation between March and October 2018), it appreciated by about seven per cent up to March 2019, the report said.
"The general government deficit is estimated to have widened by 0.2 percentage points to 5.9 per cent of the GDP in 2018-19. This is despite the central government improving its balance by 0.2 percentage points over the previous year. The general government debt remained stable and sustainable - being largely domestic and long term-at around 67 per cent of GDP, the report said.
According to the World Bank, poverty has continued to decline, albeit possibly at a slower pace than earlier. Between 2011-12 and 2015-16, the poverty rate declined from 21.6 to 13.4 per cent (USD 1.90 PPP/day).
The report, however, said disruptions brought about by the introduction of the GST and demonetisation, combined with the stress in the rural economy and a high youth unemployment rate in urban areas may have heightened the risks for the poorest households.
The significant slowdown in the first quarter of the fiscal year and high frequency indicators, thereafter, suggested that the output growth would not exceed 6 per cent for the full fiscal year, the bank said.
The report said the consumption was likely to remain depressed due to slow growth in rural income, domestic demand (as reflected in a sharp drop in sales of automobiles) and credit from non-banking financial companies (NBFCs).
However, the investment would benefit from the recent cut in effective corporate tax rate for domestic companies in the medium term, but also will continue to reflect financial sector weaknesses, the report said.
"Growth is expected to gradually recover to 6.9 per cent in 2020-21 and 7.2 per cent in 2021-22 as the cycle bottoms-out, rural demand benefits from effects of income support schemes, investment responds to tax incentives and credit growth resumes. However, exports growth is expected to remain modest, as trade wars and slow global growth depresses external demand," the report said.
The main policy challenge for India is to address the sources of softening private consumption and the structural factors behind weak investment, the bank said.
"This will require restoring the health of the financial sector through reforms of public sector banks' governance and a gradual strengthening of the regulatory framework for NBFCs, while ensuring that solvent NBFCs retain access to adequate liquidity.
"It will also require efforts to contain fiscal slippages, as higher-than-expected public borrowings could put upward pressure on interest rates and potentially crowd-out the private sector, it said.
According to the bank, the main sources of risk included external shocks that result in tighter global financing conditions, and new NBFC defaults triggering a fresh round of financial sector stress.
To mitigate these risks, the authorities would need to ensure that there was adequate liquidity in the financial system while strengthening the regulatory framework for the NBFCs, the bank added. (Source: The Business standard)


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India's growth rate to fall to 6%, will recover to 7.2% in 2022: World Bank.

Why RBI should change its repo rate stance - Pragnya IAS Academy - News Analysis.

Why RBI should change its repo rate stance.

RBI has to walk the fine line for balancing the interests of the saver and borrower.

Interest rate is a very important variable in any economy. It impacts investments by entrepreneurs for creation of capacities, i.e. growth, it impacts financial investments, and retail borrowings for consumption purposes, e.g. house, car, etc. The fulcrum for deciding the spectrum of interest rates in our economy is the RBI repo rate, currently at 6.5%, which is taken as the signal rate for the ecosystem. On its part, the RBI looks at many factors for deciding the repo rate, the most important parameter being inflation, as the real interest rate in the economy should be positive in the interest of savers. Other factors are GDP growth rate, currency exchange rate, global interest rate movement, etc.

What is the objection to the hawkish stance? When interest rates are high, vis-à-vis inflation, it is loaded in favour of the saver, which is fair to that extent. However, the RBI has to walk the fine line for balancing the interests of the saver and borrower. Capital is an important ingredient for production, and a higher-than-warranted interest rate is disincentive to the entrepreneur, since money is available to her at a relatively higher cost. In a way, the ecosystem is giving a message to the entrepreneur that we do not want you to create fresh capacities, which would have led to economic growth for the country. Same logic applies to personal consumption loans as well; if loans are available at attractive rates, consumption purchases like house or car or domestic appliances would lead to demand, and thereby have better growth for the economy.
Currently, not only is inflation on the lower side (2.33% in November), RBI’s projections are on the lower side as well. In the MPC meeting held on 5 December 2018, the inflation projection is 2.7-3.2% for the period October 2018 to March 2019 and 3.8-4.2% for April 2019 to September 2019. This is benign, very much within RBI’s target inflation rate of 4%. That being the case, rate hike bias is inimical to growth prospects for the country. Economists are discussing the probabilities of interest rate cuts in 2019, driven by benign inflation. However, for the RBI MPC, prior to a rate cut action per se, the outlook has to be changed. It is not possible for them to reduce interest rates while maintaining a hawkish rate stance; it has to be changed to neutral. The next meeting for the RBI MPC is scheduled for 7 February; it is high time they change course in the interest of growth of the country. The other possibility is change of stance and rate action on the same day, but that may be expecting too much. Hence, the likelihood is, they would shift to neutral on 7 February 2019 and take rate action in April 2019, depending on inflation trajectory and other relevant parameters. The biggest component of CPI, which is food, has seen a consistent decline over the last five years, and is currently negative on year-on-year measurement. Though food inflation would not remain negative in 2019, there is a structural improvement in food inflation, and the benefit should be transferred to the economy in terms of lower interest rates.
Net-net, given the higher likelihood of interest rate cuts in 2019, it would be better for your home or car loans, but please take care of financial planning. Things should be proportionate and loans should be within a certain percentage of your net-of-tax earnings. Lower interest rates are better for your existing investments as well; equities driven by better earnings prospects of companies (lower interest cost) and debt driven by interest rates coming down (bond prices move inversely with interest rates). Lower interest rates are not so good for fresh investments in debt, as you would be doing it at relatively lower interest rates, but the impact would not be as much as to alter your portfolio allocation decision.(Source:Livemint)


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Why RBI should change its repo rate stance.