Tough Time Ahead for Indian Economy: RBI

Bangalore: The Annual Report 2011-12 released by the Reserve Bank of India in Mumbai, has mentioned a number of elements that the report thinks would hinder the immediate economic improvement in the country.

According to the report, the Indian economy is unlikely to improve in the near term because of “policy stasis.” There is a slowdown in new investments and existing investment are getting delayed.

The economic growth in 2012-13 would stay below the trend at around the previous years’ level of 6.5 percent. The growth would remain weak as the factors that slowed down last year’s economy still persist and there is no sign of those factors getting resolved, the report said, calling inflation the main enemy of the Indian economic growth.

“There is no scope for complacency as fiscal slippage is likely” in the year through March 2013, the Central Bank report added.

According to the report released by the Central Bank, the weak growth outlook for 2012-13 is caused by a combination of global and domestic macroeconomic factors that slowed down growth in the preceding year. These factors may persist in the coming fiscal as they are showing no signs of getting resolved.

In India, the economic growth during the year is likely to stay below potential for the second consecutive year. The Reserve Bank in its First Quarter Review of Monetary Policy on July 31, 2012, had revised downwards its growth projection for 2012-13 to 6.5 per cent from 7.3 per cent, which mainly reflected drought impact on agricultural output and contraction in the industrial production.

Inflation

 “Inflation is likely to remain sticky around 7 percent with upside risks emanating from a deficient monsoon,” the report said. Earlier in July, the Central bank had left the interest rates unchanged to fight an inflation rate and at the release of its annual report, RBI said that damping price increases remains the “cornerstone” of monetary policy.

According to the Reserve bank, the impact of a low monsoon on crops, a drop in the rupee, and the need to raise fuel prices to curb subsidies are among the upside risks to inflation. Major policy challenge would be persistent price pressures.

The most severe impact of inflation would be on the poor, those without social security, commoners and pensioners. The poor households are not able to maintain their consumption level at the current prices.

The growth slowdown in Fy12 has further hindered the welfare of the common people; for firstly, it has adverse impact on employment and incomes and secondly, with low growth, there would a minimal trickling down of benefits.

Declaring the specific risks, RBI said that there could be considerable pressure on prices of pulses and edible oil and there would also be reflections on energy, especially diesel, electricity, coal and fertilizer.

The demand pressure from higher rural wages and corporate staff cost would be affecting the economy too.