RBI Monetary Policy: How lower economic growth and high inflation would affect you and me

The economic condition of the country which is on the downward spiral post the sluggish GDP figures for the first quarter received another big jolt, this time from the Reserve Bank of India.

The country's apex bank in its latest monetary policy review on Wednesday revised down its economic growth projection for the current financial year to 6.7 per cent from the August projection of 7.3 per cent. 

To add to the woes, RBI also expects inflation to rise to 4.2 - 4.6 per cent in the second half of 2017-18 from about 3 per cent earlier. 

RBI estimates come nearly one month after Central Statistics Office (CSO) announced slump in the GDP figures. Last month, data released by CSO showed that the GDP for the first quarter of the current financial year declined to 5.7 per cent from 7.9 per cent for the same quarter during last financial year. 

Why should it bother you and me? 

When economic growth declines, the investment declines. It means fewer jobs and low pay hike, if any. A higher economic growth is good news for common man. It brings prosperity and hence improves living standard for all. 

Investors are generally directly affected by the economic growth. There is a direct link between stock market and economic growth. A higher growth means corporate earnings would be good. It will also attract foreign investment that will have cascading effect on the market. 

The only saving grace of the present economic situation was that the inflation was also down along with other economic parameters. However, RBI has projected that inflation would increase to 4.6 percent. It would be a double whammy for the common man as his expenses would increase, while his income may decrease. 

RBI on economic growth 

In its statement today, RBI said that the real gross value added (GVA) growth for 2017-18 has been revised down to 6.7 percent from the August 2017 projection of 7.3 percent. 

RBI gives GVA figures instead of GDP. Both are measure of economic activities in a country. 

GDP or gross domestic product is the total value of a country’s annual output of goods and services. GVA is a measure of total output and income in the economy. At the macro level, it is the sum of a country’s GDP and net of subsidies and taxes in the economy. 

Reasons for low economic growth 

RBI has said that deficient rainfall and GST have been the two main culprits for low economic growth. It said that the loss of momentum during April-June and the first advance estimates of kharif foodgrains production are early setbacks that can lend a downside to the outlook. 

The implementation of the goods and services tax (GST) appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporate houses. 

By the end of September, the cumulative rainfall was deficient by around 5 per cent relative to the long period average, with 17 per cent of the geographical area of the country receiving deficient rainfall. The live storage in reservoirs fell to 66 per cent of the full capacity as compared with 74 per cent a year ago. 

Political implications of low economic growth

Modi government came to power on economic issues. People voted NDA for better economic prospects. Now, all the economic indicators are at the lowest, with GDP declining for last five quarters. It gives a tool in the hands of the opposition, while disgruntled elements within BJP would, of course, like to attack the prime minister and the finance minister for his failure to control economic situation. 

If the government is not able to handle the situation properly, it may have an adverse impact on its vote bank also.  By the way, RBI has maintained status quo in its policy rates in its fourth bi-monthly money policy review. 

The opinion piece has been written by Manoj Gairola, Senior journalist with News Nation