Growth prospects for 2011-12 subdued: RBI

While retaining economic growth estimates for the current financial year at eight per cent, the Reserve Bank of India (RBI) cautioned about emerging downward risks emanating from the uncertain global environment and domestic inflationary pressures. The central bank also said global commodity prices would shape its monetary policy stance in the future.

“Going ahead, global uncertainty, sticky inflation, hardening interest rates and a high base, especially for agriculture, could moderate growth in 2011-12. If global financial problems amplify and slow global growth markedly, it could impart a downward bias to the growth projections indicated in the first quarter review of the monetary policy,” the central bank said in its annual report for 2010-11 released today.

RBI had retained its growth projection at eight per cent for 2011-12 in its first quarter review in July. Overall growth in 2010-11 is estimated at 8.5 per cent, and is likely to be higher after factoring in the new index of industrial production series.

“Downside risks to growth have increased since our assessment in July. The decline in global commodity prices has not been significant, and despite all the financial market turbulence, oil prices are back to earlier levels,” RBI Deputy Governor Subir Gokarn said, while releasing the report.

On global factors, RBI said high oil and commodity prices, even after some correction, remains high and could adversely impact growth. “Persistent inflationary pressures, rising input costs, a rise in cost of capital due to monetary tightening and slow project execution are some of the factors that are weighing on growth,” RBI said.

The central bank also painted an uncertain picture of the industrial sector, where it saw downside risks outweighing upside ones. According to RBI, the downside risks arise from falling business confidence in the wake of global uncertainties, political factors and firm commodity prices amidst high inflation and a weak response of supply side factors.

“Fixed investment growth has slumped to 0.4 per cent in the last quarter of 2010-11. Private consumption may moderate if inflationary pressure persists. The core sector performance is lagging the overall economic activity, resulting in infrastructure bottlenecks,” the report said.

On inflation, the central bank has maintained its earlier stance that a moderation in prices can only be expected by the end of the current financial year. “Though global commodity prices appear to have plateaued, inflation is likely to be elevated in the near term and fall only towards the later part of the year, as monetary transmission works through further,” the report said.

RBI has projected high inflation during the first half of the current financial year, and expects it to come down to seven per cent by March.

“Commodity prices may decline further, and that would have a positive impact on domestic inflation. However, until then, we should not anticipate and draw comfort from it,” Gokarn said.

According to RBI, an incomplete pass-through of high global commodity prices and the persistence of high inflation are likely to keep inflation elevated in the near term. As a result, inflation may start falling 'sometime in the third quarter of 2011-12'.

Source: Business Standard