The document summarizes recent downward revisions to India's economic growth forecasts for 2011-2012. It notes that inflation has been higher than expected, putting the RBI's growth forecast at 8%, down from the government's earlier estimate of 9%. While the economy may reach the upper end of the RBI's 7.4-8.5% range, the document argues growth above 8% is still more likely than below 8%. Global factors like commodity and oil prices are influencing inflation, and prices may reduce over the year. The document calls for the government to address real constraints on growth like delays in mining projects rather than just accepting lower growth to reduce inflation.

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Figuring it out
Lower Forecasts Fail to Beat Hope
Earlier target of 9% growth is now out of reach
Indicus Analytics
Published: Economic Times
All across the board, growth forecasts for this year are being revised downwards.
What has changed in the last few months? Higher than expected inflation in the
economy and the underlying pressures coming in from commodity and crude oil
prices. The RBI has now given a dark forecast for 2011-12 — with growth at 8% — a
whole percentage point lower than the government budget estimate and inflation at
elevated 9% levels in the first half of the year. There is a clear flip in the stance of the
RBI, emphasising the need to accept lower growth in the short term in an effort to
tame stubborn inflation; and the finance minister seems to be going along with this
new framework accepting this as bitter medicine.
The question now is will the upper end of the range 7.4-8.5% play out or will the
economy slide down to the lower end? We have always been amongst the most
optimistic when it comes to growth in India, but given that policy makers are in sync
now with the need to lower growth, our earlier 9% estimate is clearly out of reach.
Yet we believe that the below 8% scenario is still less probable than an above 8%
growth. It is true that much will depend on how the risks materialise and how steep
the rates will rise over the year. Yet keep in mind that global factors are playing an
important role in the current inflation — commodity prices and most importantly,
crude oil being the key, these can be quite volatile.

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The short term energy outlook issued last month by the US Energy Information
Administration admits that energy price forecasts are highly uncertain, yet places a
higher probability on prices reducing below $100 by December than rising over $120.
On an average though, 2011-12 will see prices higher than the previous years, the
question is by how much and whether this rise will be allowed to pass through or will
the fiscal absorb it? The former would be the most rational solution; it is for the
government to ensure that the fiscal rollback is maintained.
The uncertainty is not restricted to just crude. Take food prices -- the FAO World
Food Price Index fell for the first time in nine months in March, with the prices of oils
and sugar contributing the most to the fall in the overall index. There will be greater
volatility this year given the low global inventories, and the picture will be clear in
another few months, with the main stress points in oils. In India rabi crop sowing has
been higher than the previous year by 10% and with a good monsoon, pressure on
prices can lighten significantly. Since two good years of rains have a significant
impact on consumer sales, given a good monsoon this year, not only will this have a
positive impact on food prices, it will also give a boost to consumption in rural and
small town India.
In painting a dire picture ahead, thereby accepting lower growth as a trade-off in the
fight against inflation, the government is still shying from addressing the key issues.
Reduce growth and inflation comes down, true but what kind of signal is this giving
to producers and consumers? More importantly, is there an alternative? We believe
that there is an urgent need for the government to take a look at where the real danger
signs are and address those.
These are all well known, and last month we had pointed to some, for instance, the
need to kick-start delayed mining projects. Recently, Coal India admitted that it is
being constrained in production planning, thanks to the policy confusion; in effect
production targets for the 12th Plan will not be as high as they could be. Double-digit
growth and inflation in the 4-5% range is actually achievable, but fixing such
constraints should be top priority now. Moving into the ‘8% is the normal’ outlook,
and denting confidence is ensuring that the Indian economy continues to perform
below potential.
Indicus Analytics
Contact Sumita Kale (sumita@indicus.net) for comments.