INDIA AND THE RBI

DON'T BLAME SLOWDOWN OF INDIAN ECONOMY ON RBI

The Economic Times, August 30, 2012

The Indian economy has slowed down more sharply than anybody could have imagined a year ago. Official forecasts peg growth for the current year in the range of 6-6.7%. Many private forecasts are more pessimistic: they project growth of below 6%. How to raise the growth rate is the big challenge for the government. To do so, we need to get a handle on what has caused the slowdown in the first place. The RBI's latest annual report sheds useful light on the subject.

Everybody understands that a combination of domestic and global factors is responsible for the slowdown. The disagreement is about the relative importance of these. The RBI report attempts to quantify the impact of each of these. The RBI's internal research suggests that a 1% increase in the real weighted average lending rate (WALR) depresses industrial output by 0.6% over a one-year horizon.

Between 2010-11 and 2011-12, there was an increase in the real WALR by 2% (using the wholesale price index as the deflator). This would translate into a decline in industrial output of 1.2%. The decline in output, however, was much steeper, down 5.3%. Thus, the rise in interest rates does not explain the sheer magnitude of the slowdown.

The RBI also estimates that a 1% increase in global growth causes industrial output to increase by 0.7%. Global growth declined by 1.4 percentage points between calendar years 2010 and 2011. The impact of the decline in global growth on industrial output should have been 0.98%, or roughly 1%.

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