RBI’s Annual Report for 2010-11discussed the Prospects of Indian Economy for the year 2011-12

The Reserve Bank of India on 25 August 2011 released its Annual Report for 2010-11. In the Annual Report the Central Board of the RBI discussed (i) the assessment of the macroeconomic performance during 2010-11 and the prospects for 2011-12, and (ii) the working and operations of the Reserve Bank and its financial accounts.

Apart from providing for an assessment of the Indian economy for the year 2010-11, the report also discuused the economic prospects for 2011-12. The RBI opined that global uncertainty, sticky inflation, hardening interest rates and high base, especially for agriculture is likely to have a moderating effect on growth in 2011-12. Also, inflation would be elevated in near term and fall only towards the later part of the fiscal.

Growth Outlook for 2011-12

•    Growth was estimated to come down but remain close to the trend of about 8.0 per cent in 2011-12. However if  global financial problems increase and slow down global growth markedly, it would impart a downward bias to the growth projection of around 8.0 per cent indicated in the Monetary Policy.
•    According to the RBI report growth prospects for the year 2011-12 would be subdued compared to 2010-11. The slowdown in performance of the economy could be attributed to high global oil and commodity prices, persistent inflationary pressures, rising input costs, rise in cost of capital due to monetary tightening and slow project execution.
•    Crop prospects remain good, though on a high base the growth is likely to turn out to be less than last year. The monsoon up to August 17, 2011 was 1 per cent below the Long Period Average. RBI’s overall foodgrains production weighted rainfall index was 101 till August 17, 2011 (88 in the corresponding period last year). Sowing up to August 12, 2011 was marginally higher than in corresponding period of the previous year.
•    In 2011-12 risks to the industrial growth was believed to be arise from falling business confidence. However robust growth of the services sector would continue to support the growth process.

Private consumption could be expected to decelerate. In face of moderating demand, expenditure-switching from government consumption expenditures to public investments was likely to help.

Inflation Outlook for 2011-12

•    Inflation, the RBI believed would remain high and moderate only towards the latter part of the year to about 7 per cent by March 2012. In case the the global recovery weakened in the latter part of the year, commodity prices would decline further. The declining of the commodity prices would go on to have a salutary impact on domestic inflation. Near zero rate policy at least till mid-2013 will be pursued. This policy stance is expected to keep the commodity prices elevated.
•    Given that the global oil prices stay at current level, further increase in prices of administered oil products will become necessary to contain subsidies. Fertiliser and electricity prices will have to be revised upward in view of sharp rise in input costs.

The report mentioned that the monetary policy has an important role to play in curbing the effects of supply-led inflation.

Outlook on twin deficits for 2011-12

•    The twin deficits required close monitoring in the backdrop of weakening global economy and the likelihood of some spillovers to the domestic economy.
•    According to the report,  the fiscal deficit in 2011-12 is expected to be more than the budgeted projections. If the economy slows down beyond what is currently anticipated, the consequent revenue erosion woulod further increase the fiscal deficit. The fiscal space to support any counter-cyclical policies is limited than what existed at the time of the global crisis of 2008.
•    CAD was expected to remain at a sustainable level in 2011-12. Estimates of sustainable CAD suggest a threshold of 2.7-3.0 per cent of GDP. Prospects for external sector for 2011-12 remain uncertain as global uncertainties could adversely impact commodity prices and exchange rate movements.
•    The robust performance of exports in 2010-11 and 2011-12 currently faces downside risks as per the report. The impact of growth slowdown in the advanced economies could partly be mitigated by continued diversification of exports.
•    With the US and Europe constituting the bulk of Indian software exports, some impact from a slowdown in advanced economies is to be expected.

Capital flows, the RBI mentioned could surge or diminish, depending upon the degree of risk aversion. If global crisis turned deep, capital flows would moderate. On the other hand, capital flows to India could increase in spells on relative returns basis and due to large interest differentials. FDI to India in quarter 1 of 2011-12 was found to have doubled.

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