Acceleration of economy likely this fiscal: RBI

Standing on the crossroads, the Indian economy could travel down the bumpy lane to a faster highway but for the current fiscal (2014-15), the growth is expected to be around 5.5 percent, the Reserve Bank of India (RBI) said Thursday.

In its annual report for 2013-14 released Thursday, the RBI said some acceleration in the economy is likely this fiscal, taking the growth to around 5.5 percent.

"Deficiency in rainfall during the 2014 monsoon season so far poses some downside risks, but overall growth in 2014-15 is likely to be better than previous year with likely revival in industrial and construction activities," the annual report said.

According to the central bank, the improvement in the monsoon since mid-July will also help contain crop output losses.

With greater political stability and a supportive policy framework, investment could turn around and the economy is poised to make a shift to a higher growth trajectory, the RBI said.

The RBI said monetary and fiscal policies, therefore, need to maintain caution during 2014-15 so that the gains in macro-stability are preserved and the disinflationary momentum gathers traction.

In the near term, the objective of macroeconomic policies should be to secure a sustainable recovery.

Meanwhile, microeconomic policies covering reforms in the areas of industry, services, international trade, labour markets, public sector management, financial markets and competition are needed to work towards improving activity levels and productivity, thus shaping improved supply responses that can help enhance the growth potential, it said.

"This approach can deliver a sustainable growth of at least 7 percent in a non-inflationary manner once global growth normalises," the RBI said.

According to RBI, 2014-15 has begun on a promising note with the Index of Industrial Production (IIP) growth beginning to look up, while inflation on an average, so far, has been lower than in the corresponding period of the previous year.

Export growth has improved, while capital inflows remain adequate. Further, there has been a healthy accretion to foreign exchange reserves that helps insulate the economy against prospective shocks that may be transmitted onshore, it said.

As to the growth outlook for the economy, the RBI said it could grow in the range of 5 to 6 percent in 2014-15 with risks broadly in balance around the central estimate of 5.5 percent.

The RBI said that the impact of weak monsoon on the power generation (hydel) will not be much and the shortfall will more than compensated by the increase in the thermal and nuclear power generation.

Overall, the economy may grow faster than in the previous year, with acceleration in mining, manufacturing, construction and trade, hotels, transport and communication sectors, the RBI said.

It said that there is a large opportunity for the private sector in the infrastructure areas like road, railways, ports and power.

"Improved contractual arrangements can rekindle interest in this space and help the investment cycle to turn around soon," the RBI said.

On the aspect of financial inclusion, the RBI said India has not fully used the technology for that purpose.

While financial illiteracy, low/volatile incomes, availability of collateral and lack of credit history come in the way of financial inclusion in a meaningful way, lack of product innovation and appropriate technology use constitute the most important hurdle in promoting financial inclusion, the RBI said.