India flags growth risks

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India's chief economic adviser Arvind Subramanian. Kris Krüg/CC BY SA

NEW DELHI (Reuters) – India called on Friday for more monetary easing as it flagged risks to economic growth and budget targets, citing a series of disinflationary impulses weighing on Asia’s third-largest economy.

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In its mid-year economic survey, the finance ministry said “tighter” monetary policy meant real interest rates in India were substantially higher than in comparable emerging economies, further clouding the economic outlook.

Faster monetary easing, the ministry argued, would help deleverage corporate balance sheets and restore banks’ profits, helping the economy realise its full potential.

While it retained an official growth forecast of 6.75 percent to 7.5 percent for the fiscal year to March 2018, the report highlighted a stronger rupee, deepening farm distress and a disruption in business activity following the launch of a new sales tax, as headwinds.

“There has been an across-the-board deceleration,” said chief economic adviser Arvind Subramanian, the survey’s author. “It is less likely than before that we will reach the upper end of the range.”

Growth slowed to 6.1 percent in the March quarter, its lowest in more than two years, following monetary reform ordered by Prime Minister Narendra Modi last November to purge high-value banknotes from circulation.

The subsequent launch of a national Goods and Services Tax (GST) has caused chaos on the ground as ambiguous rules have left firms confused on how to price their products.

In a sign of things to come, business surveys showed both services and manufacturing contracting at their fastest rate in years in July, the month that the GST was launched.

Disinflationary pressures allowed the Reserve Bank of India (RBI) last week to cut its main policy rate – the first easing by an Asian central bank this year – by 25 basis points to 6 percent, the lowest since November 2010.

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