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Home > India > Business > Business Headline > Report

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RBI sees dark clouds over Indian economy

BS Reporter in Mumbai | July 29, 2008 09:10 IST

The Reserve Bank of India [Get Quote] has painted a gloomy picture for the economy. A survey conducted by the central bank said India's gross domestic product (GDP) would grow 7.9 per cent this year against the earlier projection of 8.1 per cent.

Adding to the grim forecast was the RBI's assessment that the inflation rate would remain a concern, owing to high global oil and food prices.

The inflation rate based on the wholesale price index was estimated at 11.89 per cent in the first half of July, pushed by an increase in fuel prices.

The government's finances are also expected to be under strain on the back of high oil and fertiliser subsidies, farm debt waiver and the implementation of the Sixth Pay Commission recommendations.

The Centre has budgeted for a fiscal deficit of 2.5 per cent of GDP and global rating agencies have already raised concerns over the government missing the target.

The bad news doesn't end here. The RBI's Industrial Outlook Survey of private sector manufacturing companies pointed out that fewer respondents expected the overall situation to improve in the July-September quarter.

"Most companies expect an increase in raw material prices, and the increased production cost is expected to be adjusted by keeping inventory levels (both raw material and finished goods) at 'below average' and by increasing selling prices," the central bank said in its macro-economic and monetary development report, released a day before the first quarter credit policy review.

The only good news is a better forecast for export and import growth. But even that came with a rider of a higher trade deficit.

While the central bank did not explicitly mention it, data in the 100-page document showed that the outstanding balance on credit cards rose 87 per cent till the end of May to Rs 26,600 crore (Rs 266 billion), raising worries for bankers during a period of economic slowdown.

Similarly, despite the RBI's intervention, the credit flows to sensitive sectors such as commercial real estate and non-banking finance companies till May 23 this year were at 32 and 62 per cent, respectively.

On the positive side, there was strong demand for loans for infrastructure projects, which bankers said, were usually insulated from temporary blips such as sharp rise in interest rates.

WHAT'S THE FORECAST
 2007-08
Actual
2008-09
Earlier projection
Latest 
projection
GDP9.08.17.9
Agriculture4.53.03.0
Industry8.18.17.5
Services10.79.79.5
Corporate PAT27.024.716.0
(All data for growth in %)

Credit growth at 24 per cent remained higher than the RBI's 20 per cent target for the year, the report said. The accretion to the deposit base, particularly those of over one year, remained high, mainly due to an increase in rates, which made it a more attractive investment avenue than small savings schemes like public provident fund and post office plans, it added.

The median forecasts of the results of the professional forecasters' survey, conducted in June, are lower than the RBI's GDP growth estimate of 8-8.5 per cent and the government's projection of close to 9 per cent economic growth (see table). The Indian economy grew 9 per cent last year.


OTHER WORRIES
  • Centre's finances may deteriorate due to likely award of six pay panel recommendations, higher oil and fertiliser subsidies, debt waiver, cut in duties on petroleum products
  • Potential inflationary pressure from global energy and food prices likely to remain for some more time
  • 24% growth in bank credit to commercial sector higher than RBI projection of 20%

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