CEA flags deflation as new challenge for economy

Sanjeev Sharma

Tribune News Service

New Delhi, September 2

Expressing confidence that the economy’s growth numbers will improve to around 8%, Chief Economic Adviser (CEA) Arvind Subramanian today said the headline GDP numbers of the first quarter at 7% should be treated with “utmost care and caution”. The headline numbers of 7% for the April-June quarter when compared with the previous quarter at 7.5% showed a slowdown in the economy.

The other important take that Subramanian gave in his analysis of GDP numbers was that prices were decelerating and the challenge to the economy now was of deflation rather than inflation.

This narrative runs counter to the RBI argument of being vigilant about inflation and a deflation scenario would suggest interest rate cuts to boost the economy.

Subramanian, however, evaded questions on the need to cut rates by RBI to bolster economy in the wake of low inflation. He said the economy was growing in the right direction and the high frequency data such as revenue collection pointed towards that trend. In this context, he advised “care and caution” in looking at the headline number of 7% and suggested that the number may turn out to be higher or even substantially higher once they are reassessed which could change the direction of the growth trajectory.

He said the final growth figures for the year will turn out to be close to 8% as projected by the government.

Talking on the surprise on below-than-expected first quarter growth, Subramanian 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%. Certainly if GDP numbers are reassessed, we are closer to 8% than currently being forecast.”

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