Competitive Exams: Current Affairs 2011: India's growth rate

India's growth rate RBI Report

The Annual Report for 2010 − 11, a statutory publication of the Reserve Bank of Indias central board, covers two broad areas assessment of macroeconomy in 2010 − 11 as well as prospects for 2011 12 and working and operations of the RBI and its financial accounts.

The latest report released on August 25, like its predecessors, is a snapshot of the economy in the previous year even while it assesses its strengths and weaknesses during the current year.

Excerpts from the report covering growth prospects, inflation outlook and certain other aspects of the macroeconomy in the current year are given here.

The economy returned to a high growth path in 2010 − 11. However, there were significant challenges: Investment slowed, fiscal consolidation was achieved through one off and cyclical factors and inflation remained sticky on the back of new pressures.

In response, the RBI has raised the policy rates by 475 basis points (on a cumulative basis) since March, 2010. The central banks medium term target for inflation has been 3 per cent.

The current account deficit was contained within a reasonable limit, mainly due to an upswing in exports and a turnaround in invisibles.

After growing slightly above its recent trend in 2010 − 11, the economy can be expected to decelerate this year. But quite significantly, the growth rate will still be around 8 per cent. However, there is a possibility of global problems getting magnified and imparting a downward bias to Indias growth rate.

In general, growth prospects in the current year appear to be more subdued than last year. Apart from global uncertainties, high prices of oil and certain other commodities have a dampening effect. Other factors weighing on growth are persistent inflationary pressures, rising input costs, higher cost of capital (due to monetary tightening) and slow project execution.

While industrial growth may suffer because of loss of business confidence, the services sector is expected to make up for the shortfall and support the overall growth process.

Investment may remain soft in the near term, while private consumption may decelerate. In the face of moderating demand, expenditure switching from government consumption expenditures to public investments would help. Inflation is expected to remain high and moderate only towards the latter part of the year to about 7 per cent by March, 2012. The decline in global commodity prices has not been significant so far. However, if the global recovery weakens further in the days ahead, commodity prices may fall and that may have a salutary effect on the Indian economy.

The ultra soft monetary policy pursued by the US can keep commodity prices elevated. If the global oil prices stay at current levels, further increase in prices of administered oil prices will become necessary to control subsidies. Fertilizer and electricity prices will also require an upward revision in view of sharp rise in input costs.

Monetary policy by itself faces inherent limitations in tackling inflation in the absence of adequate supply side responses.

However, it can still play an important role in curbing the second round effects of supply side inflation. In the face of nominal rigidities and price stickiness, there are dangers of accepting the current elevated inflation level as the new normal.

Courtesy: The Hindu and Times of India