Falling growth, inflation pose risk to stability

High inflation, slowing growth and rising fiscal and current account deficits had increased the risks to macroeconomic stability, the Reserve Bank of India (RBI) said in its Financial Stability Report (FSR) released on Friday.

“The overall macro-economic risks in the Indian financial system seem to have increased since the publication of the previous FSR in June 2012,” RBI said in the report. While the country’s potential growth rate had fallen to seven per cent, inflation continued to remain above the comfort zone, it added.

The current account deficit remained a concern for the economy, as exports fell due to weak demand in key markets like the US and Europe, while gold and oil imports remained high. RBI said on the fiscal side, the government could see a shortfall in tax and non-tax revenue because of the economic slowdown. It added the government risked overshooting its expenditure targets.

 

“The Indian economy remains sluggish, held down by slowing investment, weakening consumption and declining exports. The loss of growth momentum, which started in 2011-12, extended in the current year, with growth remaining below trend. However, inflation continued to remain above RBI’s comfort zone,” the report said.

It added RBI was concerned about the unfolding fiscal situation, given the government’s gross fiscal deficit till October accounted for about 72 per cent of the budgeted amount for the entire year, compared with 74 per cent during the corresponding period of the previous year.

In the foreword to the report, RBI Governor Subbarao said in recent quarters, growth had moderated due to the global economic situation and domestic policy uncertainties. “Growth...needs to accelerate if the momentum of poverty reduction, employment generation, and pay-off from the demographic dividend is to be accelerated,” he said.

RBI has projected growth in gross domestic product this financial year at 5.8 per cent. In the first half of 2012-13, the economy grew 5.4 per cent, compared with 7.3 per cent in the corresponding period last year.