Mumbai, July 24: The Reserve Bank (RBI) today tossed a sweet and sour salad of prospects for the Indian economy: the good news is that the engine of growth is chugging along quite well with the central bank pretty confident that the growth momentum will be maintained in 2006-07.
In 2005-06, the Indian economy was among the fastest growing in the world with a growth rate of 8.4 per cent.
All the indicators seem to show that the economy will maintain at least an 8 per cent growth ' and the forecast is predicated on some nifty growth in the manufacturing and service sectors.
The RBI also trumpeted the fact that inflation-fighting measures appeared to be working with the headline inflation rate well within the “indicative trajectory” during the first quarter of 2006-07. The RBI had earlier forecast that inflation would be kept within a tight band of 5 to 5.5 per cent at the end of March 2007.
“Inflation expectations remained largely stable, reflecting pre-emptive monetary policy actions which have helped in anchoring inflation expectations,” the Reserve Bank said in its document ‘Macroeconomic and Monetary Developments ' First Quarter Review 2006-07’ which it released today, just a day before its monetary policy review.
But there are a couple of lingering worries: the rain gods haven’t been as benevolent this year. The cumulative rainfall recorded between June 1 and July 12 has been 10 per cent below normal compared with 1 per cent above normal a year ago. This doesn’t augur well for a monsoon-dependent agriculture sector.
There are two other big worries that the central bank highlighted: first, the already yawning deficits of the government have widened some more. Second, money supply is expanding at the rate of 18.8 per cent against 13.8 per cent last year. If there’s more money swilling about in the economy, there’s a danger that inflation could spiral out of control.
The RBI said the optimistic outlook for the economy depended a lot on burgeoning industrial production that registered a growth of 9.8 per cent. The manufacturing sector, which posted a double digit growth of 10.9 per cent, continued to be the key driver of industrial activity contributing almost 92.5 per cent of the growth in industry. This growth rate is the highest for this period in the last decade. However, electricity and mining sectors continued to exhibit subdued growth.
According to RBI, the robust performance of the manufacturing sector was largely led by chemical and chemical products, machinery and equipment, basic metal and alloy industries.
The one blip was the fact that the infrastructure sector recorded a growth of 5.9 per cent in April-May compared with 7.1 per cent in the same period last year on account of deceleration in all industries except petroleum refinery products. But the services sector ' which accounts for 52 per cent of the gross domestic product 'has recorded a double-digit growth during the last two years, proving that it is the major engine propelling the economy.
The RBI noted that confidence among the business community remained high.
“Various business confidence surveys suggest that economic activity is likely to remain buoyant in the near term. According to RBI's latest industrial outlook survey, the business expectations index for July-September 2006 quarter increased by 5 per cent over the previous quarter’s level,” it said.
The assessment of the overall business situation for April-June 2006 showed an improvement in confidence and responses to the survey suggested an improvement in expectations for the overall business situation, production, capacity utilisation, order books, selling prices and profit margins.