RBI optimistic on growth outlook despite new risks

Central bank had scaled down growth projection from 5.7% to 55.5% in first quarter review of monetary policy at end-July

Despite the new risks that has emerged, the Reserve Bank of India (RBI) is optimistic on the growth outlook for the current financial year which is pegged at 5.5%.

This is on the back of supportive measures taken by the government and a good monsoon. RBI had scaled down growth projection from 5.7% to 55.5% in the first quarter review of the monetary policy at end-July.

“Recovery is possible and can take shape later in 2013-14, but is predicated on better governance, the removal of supply constraints and maintenance of stability. Despite the new risks, as a baseline the real Gross Domestic Product (GDP) growth outlook for 2013-14 is better than that in 2012-13, following the growth supportive measures taken by the Government of India and the south-west monsoon that has performed well so far,” said RBI in its Annual Report 2012-13 released today.

According to RBI the normal and spatially well-distributed rainfall so far during the south-west monsoon augers well for the agriculture sector and is expected to boost rural demand for industrial goods and services.

RBI's foodgrain production weighted index showed that rainfall was 10% above normal in the current monsoon season till August 13, 2013. “Ample rainfall has resulted in an improvement in the water shortage levels in reservoirs,” said RBI in the report.

RBI said that these improvements would benefit the Kharif and the Rabi crops, as also hydropower generation. Besides that the crop prospects are also encouraging, noted RBI.

“Encouraging prospects for crop also augers well for rural demand. The current slowdown in any case, has impacted economic activity in urban areas more than in rural areas. As such, the rural economy could provide some buffer on the back of satisfactory monsoon,” said the annual report.

However, industrial growth has been nearly stagnant for two years now, with signs that the stagnation has extended into 2013-14, said RBI. 'Corporate performance continues to weaken as a result of slowing activity levels in industry and services sectors,” said RBI.

In the corporate sector operating profit margin was maintained at the level observed in the previous quarters but the net profit margin declined due to higher interest to sales ratio. But according to the annual report the downward spiral could get arrested with some uptick later in the year as improved rural demand and better project execution supports activity.

But RBI believes that in attempting to revive demand, it is important to reduce the current high consumer price inflation. “This is necessary to arrest the flagging growth rate of private final consumption expenditure,” said RBI.