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Growth cloudy, but inflation's a ray of hope

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The Reserve Bank of India On Tuesday lowered the projection for the current financial year to 7 per cent, with a downward bias, from 7.5-8 per cent in the wake of the deterioration in the global economic environment during the last three months and heightened uncertainty in the international financial system.

The central bank’s growth projections are in line with the forecast of the finance ministry and marginally lower than the estimates put out by the Prime Minister’s Economic Advisory Council last week.

A survey of professional forecasters carried out by RBI estimated that the economy will grow at 6.8 per cent in 2008-09 after seeing a growth rate of 9 per cent or more during the last three years.

At 7 per cent, the growth rate will be lowest since 3.8 per cent recorded in 2002-03 (see table).

The lower GDP growth is mainly on account of a slowdown in the industrial and services sectors, barring segments such as communications and freight movement. Apart from the fall in domestic demand, weakening of external demand has affected the industrial sector.

While the global outlook remains uncertain, RBI Governor D Subbarao pointed out that the effects of the downturn were reflected in a slowdown in industrial growth and corporate profits and a fall in exports during October and November. In the coming months, import growth is expected to moderate faster than the rise in exports, RBI said.

The silver lining came in the form of a fall in commodity prices which is expected to help inflation based on the wholesale price index (WPI) fall to 3 per cent by the end of March, from 5.6 per cent in early January.

RBI had earlier estimated that inflation would hover around the 7 per cent mark by the end of March.

“However, inflation could fall well below 3 per cent in the short-term partly because of the statistical reason of high base, and the global trends caused by exceptionally high oil and commodity prices,” it said.

But RBI was worried over inflation based on consumer price indices staying in double digits along with primary article inflation within the WPI-based category.

Despite the gloom on the economic growth front, RBI said that once the global recovery starts, India’s turnaround will be sharper and swifter due to the strong fundamentals and untapped potential.

Though integration with the global economy had affected economic growth, RBI said Indian markets by and large remained orderly and there was a marginal decline in the financial resources to the commercial sector as resource mobilisation from capital markets and external commercial borrowings had been affected.

As a result, banks are seeing more demand for loans, which is reflected in a 24 per cent rise in credit flow. Recognising the shift, RBI raised the projection for growth in non-food credit, including investment in securities and commercial paper, for the current financial year to 24 per cent from 20 per cent earlier.

Since banks have had to resort to more deposit mobilisation to feed higher credit growth, RBI said that aggregate deposit growth in 2008-09 was estimated at 19 per cent, as against 17 per cent projected in April.

RBI raised the money supply projection for 2008-09 from 16.5-17 per cent to 19 per cent to account for the reduction in the statutory liquidity ratio, cash reserve ratio and stimulus package announced by the government to boost economic activity.

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