RBI's concern over decelerating economy

By Our Special Correspondent

MUMBAI, AUG. 28. The Reserve Bank of India today stated that the industrial outlook continues to be uncertain and a cause for considerable concern.

In its Annual Report 2000-01, the RBI stated, ``The deceleration of economic activity for the second year in succession has raised some concerns about the feasibility of rapidly moving the economy to a higher growth path in the medium term. The recent growth experience has undoubtedly revealed some areas of concern that could impede the path to sustained high growth.''

The rate of capital formation has been declining over the second half of the 1990s, mainly reflecting the inadequate response of private investment to the current state of structural reforms and deceleration in public investment. Given the unsatisfactory capital accumulation, infrastructural requirements are emerging as binding constraints on growth.

The size and quality of fiscal adjustments have also remained insufficient, resulting not only in shifts in the pattern of aggregate demand from investment to consumption in the Government sector but also undermining the output and quality of delivery of public services. ``The large and growing financing requirements of the Centre and States have occasionally strained the financial markets, rendering the conduct of both monetary policy and debt management more complex,'' the RBI stated.

The realisation of the growth rate projected in April 2001 is dependent on a sharp reversal in current industrial trends during the post-monsoon period. In April, the statement on Monetary and Credit Policy has projected a growth rate of 6 to 6.5 per cent for 2001-02. The RBI stated that during 2000-01, the GDP growth was at 5.2 per cent, reflected the impact of two consecutive years of below-average monsoons, a downturn in industrial growth after promising signs of revival in 1999-2000, the strains imposed by droughts and floods in various parts of the country and the unprecedented severity of the Gujarat earthquake.

However, the RBI stated that inflationary conditions are expected to remain supportive with headline inflation is around 5 per cent. ``Money supply expansion is expected to be about 14.5 per cent, amply supporting an expansion on non-food credit of the order of 16-17 per cent, assuming that there would be a pick up in industrial activity,'' the RBI hopes.

A major objective guiding the conduct of the monetary policy is the close monitoring of financial market conditions with a view to flexibly shifting policy operations towards managing excess liquidity, ``should circumstances warrant,'' the RBI stressed.

The current account deficit is expected to be well below 2 per cent of GDP even if non-oil imports show considerable increase in the event of a pick up in economic activity, the RBI stated. The fiscal deficit of the Centre is budgeted at 4.7 per cent of GDP and over three-fourth of the Centre's net borrowing requirement has already been completed. The RBI stated that the Centre is also closely monitoring the fiscal developments in various States.

The RBI stated, ``the growth prospects for 2001-02 will also depend to a certain extent on the global developments and the bottoming out of the current slowdown in world output, trade and international capital flows. The availability of more recent information on the performance of the real economy will no doubt entail a conditional adjustment to these initial expectations.''

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