Switch from GDP to GVA was mainly to conform to global standards: RBI

The Reserve Bank of India kept its policy repo rate unchanged at 6% on Thursday for the fourth straight meeting and stuck to its 'neutral' stance as expected to support an early recovery in economic growth as inflation eases. Excerpts from RBI MPC panel's interaction with media

Could you further explain the impact of the HRA on inflation?

Executive Director M Patra: In the monetary policy report of April 2016 we did a detailed analysis of the VII Pay Commission and its recommendation’s which include salaries, allowances etc. Of this the HRA (House Rental Allowance) has a bearing on inflation, housing has a weight of 9.5 per cent in the CPI (Consumer Price Index), so that what happens in the housing [sector] matters to the path of inflation. When the CSO (Central Statistics Office) measures housing, while it collects rentals from all over the country, for the government housing it imputes a house rent, which is the HRA. Now, under the VII Pay Commission’s recommendations, the HRA was increased by 105.6 per cent, so that is what it would impute, that is not real inflation it is just a statistical effect, which is bossing up CPI. So just to focus on the real underlying inflation pressures, we are excluding HRA from the CPI. For the first half, if you exclude housing the projection comes down by at least 356 bps (basis points), which is the full measure of HRA that started in July and peaked in December, and will wear out during 2018.

Governor Urjit Patel: Because of the HRA on account of the central government wanes, the impact on inflation ex-HRA in the second half is not there. In the first half it makes a difference, in the second half, it doesn’t a difference. Going forward as state governments roll out their HRA revisions, we will have to be cognizant to exclude that from the CPI index to gauge the exact amount of inflation. And that first round, statistical effects of the HRA revisions from the state governments, would also have to be excluded, however, if there are second-round effects on account of expectations and aggregate demand those we will take into account. But the pure statistical effect of the HRA revisions, have to be excluded from the CPI and we had telegraphed this in April 2016.

What is the reason behind the switch from GDP (Gross Domestic Product) to GVA (Gross Value Added)?

Deputy Governor Viral Acharya: In terms of the switch from GVA to GDP as the headline measure of economic activity, I think it is mainly to conform to international standards. Globally, the performance of economies is gauged in terms of GDP, this is also the approach followed by multilateral institutions, international analysts and investors. And primarily they all stick to this norm because it facilitates easy cross-country comparisons and also the CSO has started using GDP as the main measure of economic activity since January 2015. So even though there are good economic reasons to employ GVA as the supply-side measure of economic activity we have decided to GDP.

We have seen that through February and March the CPI has remained low, and is estimated to continue to be low during the next fiscal year, so why is the policy stance still neutral? And why has there not been a rate change?

Patel: The inflation prints for February did turn out to be softer than our projection; much of this is because of the seasonal softening of the prices of vegetables that occurs during the winter months. However, the MPC (Monetary Policy Committee) looks ahead and we noted that there are several uncertainties around the base-line inflation path which is why we kept the stance neutral and the rate unchanged. First, there is the uncertainty around the revised formula for MSP (Minimum Support Price) as announced in the Union Budget (2018-19) for Kharif crops, which may have an impact on inflation although the exact magnitude will only be known in the coming months as the program is rolled out. Then there could be some fiscal slippage from the Union Budget estimates or over the medium-term which could adversely impact the outlook on inflation. There are also risks in this area from fiscal slippages at the level of state governments on account of higher committed revenue expenditure. The companies and firms that we poll in the Reserve Bank of India's (RBI) Industrial Outlook Survey, expect input and output prices to rise going forward, and lastly, the volatility in crude oil prices has imparted a fair bit of uncertainty to the near-term outlook. For these reasons, we have continued with status-quo, and risks tilted to the upside. We will closely monitor the evolution of the handful of factors and how they impact inflation.

Bankers have said that given the new debt resolution framework put out by the RBI, close to 800-900 accounts would have to be classified as NPA (Non-Performing Assets) or that they would need debt resolution. Are you concerned that this could lead to a risk-aversion for banks to lend? And also if the investment pattern of companies will get impacted?

Deputy Governor NS Vishwanath: The reasons why we introduced these revised guidelines, is because we believe that the IBC (Insolvency and Bankruptcy Code) has given a framework for the resolution of stressed assets, and the developments that have been happening has given us some comfort that it will go in the right direction. The second part is that default definition is one-day but NPA by definition means 90-days. So we do no say that this circular by itself should result in more NPAs coming. What we have of course done is to withdraw those schemes which resulted in banks postponing their recognition.

Recently, the Governor spoke about the absence of regulatory powers on the public-sector banks (PSBs), and there have been lapses in private sector banks as well. Have there been any developments, from a regulators point of view, to these institutions?

Governor Urjit Patel: Those are two different issues and they are not related. What has been said in the speech and debate around it relates to the legal powers that the RBI has, which seem to be asymmetric between PSBs and private sector banks that has got nothing to do with our supervisory and regulatory action on any bank concerned.

Have you been talking to centre regarding the regulatory powers of the RBI, whether you can modify them and act tough of the PSBs?

Deputy Governor N S Vishwanath: This requires amendments to the Banking Regulation Act (1949), as the Governor said the non-neutrality of the RBI’s powers come from the provisions of the Act, and that needs to be changed. The Governor has made the banks position very clear; there will be discussions on this.