Economic growth could decline to 8%

RBI cites global financial woes as reason

“On current reckoning, real GDP growth is expected to moderate to around 8 per cent in 2011-12 from 8.5 per cent in 2010-11,” RBI said in its annual report for 2010-11.
Growth prospects for the year 2011-12 seem to be relatively subdued compared to the previous year due to a number of unfavourable developments, it said.

“Global uncertainties have increased. If global financial problems amplify and slows down global growth markedly, it would impart a downward bias to the growth projection,” it said. Besides, high food and non-food commodity price inflation pose risk to growth, the central bank said.

The global oil and commodity prices, even after some correction, remain high and could adversely impact growth.

Persistent inflationary pressures, rising input costs, rise in cost of capital due to monetary tightening and slow project execution are some of the factors that are weighing on growth, it said. While the prospect for the farm sector looks encouraging with the normal south-west monsoon so far, industrial sector growth is likely to decelerate due to above mentioned factors, it added.

The growth of the services sector will be driven by the unfolding of the global and domestic economic situation, but is largely expected to keep its momentum.

It is expected that the robustness of the services sector, which accounts for more than 65 per cent of GDP, would continue to support the growth process, it said.

From the demand side, it said moderation is expected as investment may remain soft in the near-term, while private consumption may decelerate.

In face of moderating demand, expenditure-switching from government consumption expenditures to public investments would help, the report said.

Further, RBI said, high inflation is likely to persist for some more months as global commodity prices are still elevated and that monetary policy actions alone cannot bring down the rate of price rise in the country.

“On a year-on-year basis, inflation may remain stubborn in the near-term and start falling sometimes in the third quarter of 2011-12 to about 7 per cent by March 2012,” RBI said.
It said while monetary policy has a role to play in bringing down inflation, but it alone cannot suffice without “complementary policies” in place.

The apex bank said the high inflation over the last two years has brought to the fore the limitations in arresting inflation in absence of adequate supply response.

The report said that international commodity prices, including crude oil, have weakened since July-end on account of deterioration in global growth environment.

Using a methodology developed by two international economists, RBI said an increase of 10 percentage points in oil price inflation, if passed through fully to consumers, would lead to rise in Wholesale Price Index (WPI) inflation by two percentage points.



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