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RBI worried but not alarmed Drought cloud on 6.5% growth

Mumbai, Aug. 30: The hint was there a few days back. The official confirmation came today: Reserve Bank of India does not think that the country is going meet the 6-6.5 per cent growth target this fiscal.

In its annual report card (2001-02) on the Indian economy released today, RBI said that the ongoing drought condition could adversely affect industrial recovery which would put pressure on the overall growth performance.

However, the central bank was quick to add that it was not yet time to press the panic button as some positive factors, that are quite discernible, can change the tide in economy’s favour in the second half.

Projecting a “mixed” macroeconomic outlook for the year, RBI highlighted both the strengths and weaknesses of the Indian economy. “On one hand, financial, liquidity and inflationary conditions favour higher growth. Similarly, the external front is also strong with growing foreign exchange reserves and a competitive exchange rate. On the other hand, the agricultural outlook is sombre with the likelihood of widespread drought.”

With such contradictory forces at work, the central bank said there is a strong possibility that the growth rate of 6 to 6.5 per cent projected in the April monetary and credit policy and based on the assumption of a normal monsoon will not be realised and may be lower than that projected earlier.

Yet, it did not press any alarm bells regarding macro-economic stability and has not forecast any undue inflationary pressures on the economy despite the poor monsoon due to “substantial foodgrain stocks, comfortable foreign exchange reserves and the ability of the economy to absorb supply-side shocks”.

It added that a re-assessment of the projected growth rate for the current year will be attempted in the busy season monetary and credit policy due in October, “by which time reliable information regarding the effects of drought on agricultural and industrial output will be available”.

Earlier this month, an RBI official had said it was likely to scale down its estimate for GDP growth to 5 per cent.

The central bank said the drought could affect public finances, since unforeseen expenditure by the Centre and states was likely. However, here too, it did not show any grave concern as it said that in view of the comfortable liquidity conditions, such slippages can be accommodated by a combination of measures without seriously affecting the financial markets.

Dwelling on the banking sector, the RBI said that there are a few areas regarding the efficiency of this system that raise concerns. This includes the high level of non-performing assets and the process of debt recovery and asset restructuring initiatives that have been slow.

The RBI also said the outlook for the external sector is encouraging, with reserves at a record level. The country’s external debt, it added, also fell marginally to $ 98.1 billion, lower than $ 99.7 billion in the previous year.

Meanwhile, the RBI attributed the bearish sentiment on the bourses to the slump in the global capital markets and uncertainties about the monsoon. The BSE sensitive index fell 11.6 per cent by August 16, but the fall in the BSE 500 index (of 4.6 per cent) was moderated by buying interest in stable low-priced mid-cap stocks, the report said.

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