NEW DELHI: Government today flagged deflation as a new challenge for the economy but expressed hope that the growth will be close to 8 per cent in the current fiscal year, notwithstanding lower first quarter GDP number.
"Overall, economic growth is moving in the right direction, although its pace is still below what the economy needs... but at a pace that is expected to pick up in response to the ongoing reforms."
"And one real challenge that looms ahead appears not to be the price inflation but the possible price deflation," Chief Economic Advisor Arvind Subramanian said.
Talking to the reporters on below-than-expected first quarter growth, he said, the numbers suggest that "economy is recovering" and is consistent with the other more high-frequency indicators such as revenue collection and real credit growth.
On growth forecast, he said, "the Economic Survey said 8-8.5 per cent. Certainly if GDP numbers are reaccessed, we are closer to 8 per cent than currently being forecast."
Several agencies including Fitch and other experts have lowered the growth forecast for the current fiscal in light of the global financial turmoil and the slowdown in pace of reforms.
The first quarter GDP data released by the government on Monday revealed that the economic growth, measured by GVA slowed to 7.1 per cent as against 7.4 per cent in the corresponding period last fiscal. The GDP, though expanded at 7 per cent, up from 6.7 per cent.
As regards to inflation, the wholesale price index has been in the negative zone since November 2014, while the retail inflation (CPI) too has fallen sharply.
Subramanian, however, evaded questions on the need to cut rates by RBI to bolster economy in wake of low inflation.
RBI Governor Raghuram Rajan, who had cut rates by 0.75 per cent in three tranches since January, maintained status quo in the last monetary policy review in August despite pressure from the industry and the government. The next policy is due on September 29. Subramanian said that one has to look at the GDP numbers in "totality" to assess developments in the economy.
"The numbers that came out, the quarterly GDP, the headline number of 7 per cent, should be treated with utmost caution and care," he said.
However, he added, these numbers in totality seemed to be "pointing at the same direction -- a recovering economy... people need to understand that these numbers are much better. The point is that we need to look at the totality of the numbers. We too should look at the totality of prices that we have."
He further said that despite decline in nominal GDP, the indirect tax collection has grown very substantially, even after discounting for additional measures undertaken in the budget to raise revenue.
"Underlying buoyancy seems to be there in the tax numbers. The second question is that how do you reconcile a recovering economy with... And the answer to that is pretty simple.
"Essentially there is a fair amount of slack in the economy and that is why we are not close to the full potential of the economy. That slack is what makes the deflationary pressures to take hold," he added.
While the nominal GDP in the first quarter of the current declined to 8.8 per cent from 13.4 per cent a year ago, the GVA halved to 7.1 per cent from 14 per cent.
The indirect tax collection during April-July registered an increase of 37 per cent and after discounting for fresh initiatives, the growth worked out to be 14.6 per cent.
"If the revenue maintains at this pace, it is quite likely that the GDP growth numbers will be higher, may be even substantially higher than what was suggested by the latest numbers," he added.
Observing that were some kind of uncertainty and confusion about some of the methodology of computing national income and also the actual estimates, Subramanian said, "at a time when international prices of oil and commodities have been declining, the quarterly GDP estimates need to be treated with particular care."
Citing 3.7 per cent CPI and (-)4 per cent WPI inflation, Subramanian said, "in the overall assessment, one should worry a fair amount about deflation. In the Economic Survey we forecast (inflation) would be 5-5.5 per cent. We are going to be closer to that."
He further said that macroeconomic stability and economic reforms would translate into higher growth and more jobs.
"I don't know how the economy will evolve exactly. But the combination of oil price decrease, the fact that macroeconomic stability, the fact that reforms (are being undertaken), the fact that inflation is down and interest rates have come down... all of these should contribute towards annual growth towards that have been forecast in the Survey. Higher growth should translate in higher job creation." he added.
Citing subdued prices and low GDP and GVA deflators, Subramanian said, "the data seems to suggest we are closer to deflation territory and far far away from inflation territory."
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