The Reserve Bank of India's annual report for 2004-05, released on Monday, is gung-ho about growth, despite the uncertainties surrounding the global oil prices.
The report has reaffirmed the bank's projection of 7 per cent growth in gross domestic product outlined in its annual policy statement in April. There has also been no change in its annual inflation target of 5-5.5 per cent.
The annual report has not dropped any direct hint on rising interest rates, though there is a mention of the liquidity overhang in the system.
There are many a trigger for this bullishness: the revival of the southwest monsoon, robust manufacturing activities, high corporate profitability, buoyant equity markets, strong merchandise exports and imports, sustained demand for non-food credit and a vibrant service sector.
The RBI is confident that domestic factors could well counter-balance the global uncertainties and help maintain economic growth and stability.
"While global factors are getting to be increasingly significant for India, the domestic factors still dominate and point to favouring stability to maintain the growth momentum," the annual report said.
There are, however, pockets of concerns. For instance, the manoeuvrability on oil prices is getting limited and with better industrial outlook, the pricing power of corporations is rising.
"The pricing pressure, if it were to occur from the supply side, could get complicated by continuing the overhang of excess domestic liquidity. While the economy has the resilience to withstand supply shocks, the upside risks do exist," the annual report said.
Hence, the inflationary situation is to be watched closely and "any complacency on this count could have adverse consequences for both stability and growth".
It has, in fact, warned the government for its inaction in raising domestic fuel prices. Pointing out that spikes in the fiscal burden could increase the burden, the annual report said, "Holding back the pass through of international prices to domestic prices involves quasi-fiscal costs which could eventually turn into a binding constraint for the fiscal authority."
It has committed to take necessary steps "in response to the evolving situation" to maintain price stability and ensure appropriate liquidity to meet credit growth and support investment and export demand in the economy.
According to the report, the performance of the industrial sector is strengthening and the indicators of growth in the service sector are positive.
On a year-on-year basis, the manufacturing sector growth in June 2005 has been the highest since June 1996. The other contributing factors are: rising corporate profits, stable lending rates and a buoyant investment climate.
"On balance, though uncertainties and supply constraints remain, domestic growth impulses appear to have been reinforced in the first quarter," it said.
Referring to the rising international oil prices, the report said the outlook remained highly uncertain with limited scope for enhanced supplies in the near future, taking into account of inventories, unutilised capacities and gestation period of new investments.
There will be impact on prices, output, competitiveness and disposable incomes even though the rising prices have not yet triggered generalised inflationary pressures -- a common feature in earlier oil shocks.
The revaluation of the Yuan would have a positive impact on India, it said. "As per current indications, the impact on India is assessed to be marginally positive on trade account, neutral on current account and somewhat uncertain on capital flows, but is unlikely to be negative for India, though the capital flows could be potentially volatile on the global front," he report indicated.
Emphasising that the prospects for economic growth were strong and inflation had been contained so far, the RBI said sustaining the growth momentum would depend upon policies on oil prices, diversification of agriculture, improvements in urban infrastructure, fiscal consolidation and a positive investment climate.
