Mumbai, Aug. 29: The economy will grow at a robust 7 per cent this year but three lurking spooks ' inflation, a late-monsoon damper on agriculture and lower jobs growth ' could spoil the party, says the Reserve Bank in its annual report released here today.
The biggest worry is over high crude prices, which climbed to $70 a barrel today as Hurricane Katrina was poised to wreak havoc in the US. Rising crude prices have set nerves jangling over the impact they could have on the inflationary spiral within the economy.
There are no immediate fears as yet ' inflation is firmly wedged in a 5 to 5.5 per cent band this year ' but the RBI warned against any complacency in managing price stability that could choke off growth.
Caution is the watchword in the central bank’s annual report for 2004-05, which noted that the outlook remains highly uncertain with limited scope for enhanced oil supplies in the near future. It cautioned that this could impact prices, output, competitiveness and, indeed, disposable incomes. Although inflation rates in India have been contained by the Centre, which has balked at the thought of raising fuel prices for a second time this year, the RBI has warned that the failure to bite the bullet has exacerbated the government’s fiscal burden.
“Holding back the pass-through of international prices to the domestic economy involves quasi-fiscal costs, which could eventually turn into a binding constraint for the fiscal authority,” the report said. It further added that spikes in crude prices could result in increased fiscal burden in terms of duty concessions, larger petroleum subsidies or lower dividends from public sector oil enterprises.
The report had its positive features. It said industrial sector outlook was likely to remain buoyant and noted that despite several global uncertainties, domestic factors indicate an economy growing in a stable environment.
Pointing out that a credible policy to fight inflation is critical to stop the translation of higher oil costs into wage-price spirals, the annual report said pricing pressures from the supply side could get complicated by the continued overhang of excess liquidity.