Key Takeaways From RBI’s Annual Report

The Reserve Bank of India presented its annual report on August 23, 2012, its findings adding to the already gloomy economic scenario. According to the report, the GDP growth will be lower and the inflationary risk will continue to hover for a longer time. Even with the recent softening of the WPI to below 7 per cent (6.87 per cent) and of the CPI in single digit i.e. 9.86 per cent, the RBI has stated that the shortfall in the monsoon will eventually lead the food prices to move upwards in the coming days. As such, it is quite possible that in the next mid-quarter review of the monetary policy scheduled for September 17 the RBI would may take a pause and keep the rates unchanged. The following are some of the key points extracted from the RBI’s annual report of 2011-2012:

• Growth during 2012-13 is expected to stay below the trend at around the same level as in the previous year (6.5 per cent). Inflation is likely to remain sticky at around 7 per cent with upside risks emanating from a deficient monsoon.
• Going forward, the priority should be to bring down the twin deficits to support potential growth even if it means a slower pace of recovery in the short run.
• Interest rates increased during 2011-12 and may have impacted investment, but they are clearly not the primary reason for the downturn. Computation from accounts’ level data shows that real (net of inflation) weighted average lending rate (WALR) was 3.8 per cent in 2011-12, lower than the average of about 7 per cent in the pre-crisis period of 2003-04 to 2007-08 when investment had boomed.
• Newer uncertainties for growth have emerged from an unsatisfactory monsoon so far, which is likely to result in contraction in foodgrains’ output in 2012-13.
• In 2012-13, the south-west monsoon up to August 16, 2012 was 16 per cent below the long period average. The deficiency as measured by the RBI’s production-weighted rainfall index is even higher at 21 per cent. This has affected kharif sowing with sowing for coarse cereals and pulses being 16 per cent and 12 per cent below normal. However, the drought conditions are less severe than that during 2009.
• The latest assessment suggests that there could be considerable upside pressure on the price of pulses. The prevailing drought in parts of the U.S., Eurasia and Australia may add to price pressures on food in the global markets. The other upside risks arise from suppressed inflation in the energy prices of diesel, coal and electricity.
• With growth remaining slow, budgetary targets are at risk. A shortfall in indirect tax revenue, decline in corporate earnings, difficulties with disinvestment and expenditure overshooting due to under-provision of petroleum subsidies are likely to put the fiscal position under pressure.
• In the recent period, the current account deficit (CAD) has been managed by improving the debt inflows. However, this has long-term costs for debt sustainability and increases the refinancing risk over time. Therefore, there is an urgent need to step up the non-debt creating inflows, especially in the form of foreign direct investment (FDI).
• The RBI’s collation from banks and financial institutions show that the envisaged total fixed investments in new projects that were sanctioned financial assistance during 2011-12 dropped by 46 per cent to about Rs 2.1 trillion. This drop was led by infrastructure and metals. The envisaged investment in infrastructure declined by 52 per cent to Rs 1 trillion with power and telecom accounting for most of this fall.
• There is a need to make doing business easy by adopting models like the one in Singapore, where multiple agencies and ministries sit together to quickly take decisions about investment projects.
• The RBI’s assessment is that financial inclusion is a substantially unfinished agenda and efforts need to be up scaled.