Dismal scenario

The Reserve Bank of India’s annual report would not receive the attention it receives now, if the issues and the scenario it reports about were normal. But these are difficult times for the economy, with a scaled down target of growth, soaring inflation, troubled financial markets and unfavourable  global circumstances. These are the factors that have caused concern to the  bank in the last many months and they will continue to preoccupy it in the near future.

It is quite clear about the big threat to the economy, posed by inflation. It knows it has a role to fight it, and is frank about it. It warns against accepting the present high levels as the ‘’new  normal’’, but sees the rate at about 7 per cent by the end of the financial year. It has raised the policy rates 11 times since March 2010 and the report has indicated  it would continue thke harsh stance in the near future. It hopes that monetary policy may help to curb the second round effects of supply side inflation.

But there is a note of dismay over the lack of support from the government for its actions. Even this is not new. The RBI has expressed this sentiment in the past also. It has said that two years of inflation have ‘’laid bare its imitation…in the absence of adequate supply response’’ from the government. It is not only global factors which are inhibiting growth and fuelling inflation. Weak external demand and high commodity prices are a reality but factors like the inability to ramp up supply, continuous project delays, which are internal, had a major role in the deterioration of the economic  situation.

There are other worries too. The fiscal budget for the current year is likely to go beyond budgetary projections. The government’s capital spending has gone down while overall expenditure has gone up. If growth slows down, which is likely, revenues will decline and the deficit will widen further. At the same time the fiscal ability to act in a difficult situation is more limited than during the 2008 global crisis.

Investment may fall and there is a downside risk to industrial growth. All these paint a gloomy picture where only better agricultural growth prospects remain a bright spot. Overall, the report is not an encouraging one, but it is realistic. Its suggestions and recommendations should receive the government’s urgent attention.