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Rediff.com  » Business » El Nino, Iraq crisis may hamper economic recovery: Survey

El Nino, Iraq crisis may hamper economic recovery: Survey

July 10, 2014 09:59 IST

Though both wholesale and retail inflation were showing signs of easing, prospects of a sub-normal monsoon and high global commodity prices could hamper the possibility of monetary easing by the central bank, Economic Survey 2013-14 said on Wednesday.  

In 2013-14, average Wholesale Price Index-based inflation fell to a three-year low of 5.98 per cent.

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Consumer Price Index-based inflation, however, stayed above the central bank's comfort zone, though it showed signs of moderation. Food inflation remained stubbornly high.  

The survey expects monetary easing by the central bank later this financial year, as the government is expected to maintain fiscal discipline and address supply-side bottlenecks.

"The monetary management challenge will also be helped by fiscal consolidation and the addressing of supply-side constraints that exacerbate food inflation. All these factors, in tandem, are expected to create room for monetary easing later this financial year," the survey said.  

In its previous policy review, the Reserve Bank of India (RBI) had said there would be scope to cut rates if inflation fell faster than expected. RBI, which is targeting eight per cent retail inflation by January 2015, has highlighted the need for meaningful fiscal consolidation and hoped for an "environment conducive to comprehensive policy action, a revival in aggregate demand and a gradual recovery of growth".  

The survey said risks to inflation were largely due to two factors - high crude oil prices due to the geopolitical crisis in Iraq and sub-normal monsoon, which could stoke food inflation.

"Both wholesale and consumer price inflation are expected to inch down, paving the way for monetary easing, though there are risks to the outlook for inflation from a possible sub-normal monsoon during 2014-15, as predicted by IMD (India Meteorological Department), on account of the El Niño effect, a possible step up in the pass-through of international crude oil prices, and exchange rate volatility," the survey said.  

IMD predicted this year's rain will be 93 per cent of the long-period average (the average in 50 years), with 70 per cent chances of an El Niño.  

After raising interest rates thrice between September 2013 and January 2014, RBI maintained status quo in the two subsequent policy reviews. The central bank's next review is scheduled for August 5.

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