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Why has RBI turned cautious in projecting growth figures?

By ZRG | Last Updated: Wednesday, May 8, 2013 - 12:21

Zee Research Group/Delhi

The Reserve Bank of India (RBI) in its annual monetary policy statement for 2013-14 (FY14) has projected a gross domestic product (GDP) growth rate of 5.7 percent for FY14 which is much lower when compared to the figure of 6 percent plus projected by various other agencies. It appears that RBI has adopted a cautious approach this time after consistently missing target forecast and has therefore set the GDP forecasts low for FY14.

In 2012-13 (FY13), despite revising growth projections three times in the fiscal, RBI is expected to miss the guidance by a significant margin. In April 2012, RBI predicted growth rate of 7.3 percent for FY13 which it finally revised downwards to 5.5 percent owing to the weak economic conditions. The actual growth figures for FY13 are expected to be released on May 31, 2013. While the Central Statistical Organization (CSO) estimated growth figures of 5 percent, Prime Minister`s Economic Advisory Council (PMEAC) pegged growth rate to be around 6 percent. The analyst community is anticipating the figure to hover around 5 percent.

Similarly in 2011-12 (FY12), owing to the adverse international environment and weak industrial activity at home, RBI scaled down the growth projections twice and finally predicted a figure of 7 percent GDP growth rate. However, it came as a dampener when India’s GDP growth fell to a low of 6.2 percent in 2011-12, which was way below RBI’s projections. The actual data was also nowhere near to the CSO estimate of 6.9 percent. Furthermore, PMEAC also missed the bull’s eye by forecasting a figure of over 7 percent.

Referring to the above instances, it can be easily inferred that RBI had erred in correctly predicting the country’s macro economic health. Furthermore, in both the cases RBI pegged a growth figure which was above other agencies’ estimate. Hence it appears that RBI might have projected a conservative estimate of 5.7 percent in an attempt to reduce the forecasting error this time (FY14).

Endorsing the above view, Brinda Jagirdar, consulting economist (former chief economist at SBI), said, “Earlier, RBI used to start with a high forecast figure and they had to keep cutting it down to bring it closer to reality. This time around they are starting low and if at all there is any possibility of revision then it will be an upward one. Furthermore, this may happen in the second half of FY14.”

However, D Subbarao, Governor, RBI stated in the Monetary Policy Statement for 2013-14, “Looking ahead, economic activity during the current year is expected to show only a modest improvement over last year, with a pick-up likely only in the second half of the year. Agricultural growth could return to trend levels if the monsoon is normal as recently forecast. The outlook for industrial activity remains subdued because the pipeline of new investment has dried up and existing projects remain stalled by bottlenecks and implementation gaps. Growth in services and exports may remain sluggish too, given that global growth is unlikely to improve significantly from 2012.”

While finance ministry has predicted GDP growth rate for FY14 to be in the range of 6.1 – 6.7 percent, PMEAC has pegged growth rate of 6.4 percent. However private agencies like Goldman Sachs, Credit Suisse, Morgan Stanley has estimated growth rate of 6.4 percent, 6.5 percent, and 6 percent respectively.

Commenting on the gloomy forecast made by RBI, Jagirdar, opined, “RBI’s prediction seems to be tempered with caution. RBI has become over-cautious and perhaps it is better to be on the lower side as recovery will be shallow. While RBI is being closer to realism, I am optimistic about a six percent growth based on the fact that there would be some actions from government side. However, if there is no reform measures growth will certainly suffer. We do have a lot of reasons to be skeptical about government actions.”

However, Saugata Bhattacharya, chief economist at Axis Bank has a different perspective and argued, “In my view, RBI’s growth projections are realistic. Growth prospects are improving and our own forecast for GDP growth rate is 5.8 percent.”

First Published: Wednesday, May 8, 2013 - 12:21

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