Mumbai, Aug. 30: The Reserve Bank of India (RBI) today came out with a robust appraisal of the Indian economy, but worked in several words of caution.
According to the central bank, several factors can poop the party: slow growth in agriculture, mounting fiscal deficit, infrastructural bottlenecks and re-pricing of risks in emerging market economies.
In its annual report released today, the RBI had one advice for the government. If the current momentum in India’s economy has to be maintained, there has to be policy initiatives in agriculture, improved quality of physical infrastructure and progress in fiscal consolidation. While doing so, it also listed other worries.
The central bank said though the country’s economy is exhibiting strong fundamentals and displaying considerable resilience, there are continuing signs of demand pressures, particularly high credit growth that could exert upward pressure on prices when associated with supply shocks such as from oil.
These pressures, it observed, could have the potential for impacting stability and inflation expectations.
Good news first
While maintaining that GDP growth was likely to be in the range of 7.5 to 8 per cent for this year, the RBI said developments during 2006-07 suggest that the growth momentum of recent years is likely to continue during the year.
“Early trends from industrial production, services sector indicators, trends in kharif sowing, business confidence surveys, corporate performance, external trade, monetary and credit indicators and financial market conditions support an overall optimistic near-term outlook,” the central bank said.
According to the RBI, both industry and the services sector have been showing continued growth momentum during the current fiscal.
While bank deposits and credit recorded strong growth, both inflation and inflation expectations have been contained, thereby boosting growth prospects in an environment of stability.
Areas of caution
For the industrial sector, where production displayed continued momentum during the first quarter of this fiscal, the RBI had a piece of advice. The domestic manufacturing sector, it said, will have to continuously improve its productivity and competitiveness to effectively face the likely challenges that emerge on account of competition from China.
“China has already emerged as the largest source of India’s non-oil imports,” the report said while adding that corporate houses are likely to face challenges from infrastructural bottlenecks, rising input costs from higher oil and other commodity prices and the possibility of emerging shortages of domestic skilled labour.
It is here where the RBI wanted the government to spruce up infrastructure facilities in the country, which it said will be critical to sustain and accelerate the current industrial growth.
“Infrastructural constraints in most critical areas such as power supply and urban infrastructure continue to impinge on the competitiveness of manufacturing activity,” the report noted.
Yet another area of concern for the central bank was in the area of “re-pricing of risks”. This was in evidence during May this year when correction was witnessed in equity markets, particularly in emerging economies like India.