“Steady increases in the rate of gross domestic saving and investment, consumption demand, addition of new capacity as well as more intensive and efficient utilisation/capitalisation of existing capacity are expected to provide support to growth during 2007-08,” RBI’s 345-page Annual Report 2006-07 released today stated. RBI’s GDP growth estimate stands at 8.5 per cent, with inflation at 5 per cent.

This is in tune with its first quarter review of the Annual Statement of Monetary Policy in July 2007, when it had projected a real GDP growth of 8.5 per cent. This number will stay assuming no further escalation in international oil prices and barring domestic or external shocks. Real GDP growth accelerated from 9 per cent in 2005-06 to 9.4 per cent in 2006-07.

The Central Bank also retained its inflation outlook at 5 per cent, assuming that aggregate supply management will continue to receive public policy attention and that a more active management of the capital account will be demonstrated. But it wants to continue the ongoing tight vigil.

“The possibility of inflationary pressures from domestic factors such as strong growth in monetary aggregates, elevated asset prices and large capital flows with implications for domestic liquidity conditions need to be recognised. Accordingly, a continuous vigil supported by appropriate policy actions by all concerned would be needed to maintain price stability so as to anchor inflationary expectations on a sustained basis,” the report said. Volatility in world financial markets may cloud global growth prospects and adversely affect emerging economies such as India, it warned. Rising protectionist measures, firmer oil prices, persisting global imbalances, adjustment in the US due to a housing slowdown and a potential shift in market sentiment pose downside risks to the global economy.

“These risks, if (they) materialise, could have some adverse impact on the domestic economy,” it said. “Global financial markets could turn volatile with attendant implications for emerging market economies like India. Further deterioration in sub-prime delinquencies could lead to reassessment of risk by investors across products and markets and retrenchment of capital from the emerging market economies, given the contagion and herd mentality.”

The RBI was also concerned about infrastructure. A higher growth in demand is placing greater pressure for accelerated expansion of supply of infrastructure, despite some efforts to remove supply constraints in the sector. Capacity utilisation was especially stretched in sectors such as electricity generation, roads, ports and major airports, RBI said.

Central banker’s VIEW

• Expects 8.5% growth to continue in 2007-08

• Inflation to be under 5% if things remain normal

• Calls for continuous vigil on the prices front

• Volatility in world markets may adversely affect emerging economies such as India

• Worsening of sub-prime defaults could lead to reassessment of risk

Core sector growth to touch 8% of GDP

A resurgent infrastructure sector, which has recorded growth upwards of 8 per cent this fiscal, is on an ascent. A composite index of six infrastructure industries — electricity, coal, finished steel, cement, crude petroleum, and petroleum refinery products — reveals that the industries have grown at a combined rate of 8.6 per cent in 2006-07, up from 6.2 per cent last fiscal. Of these, finished steel and petroleum refinery products sectors have shown double digit growth at 10.9 and 12.3 per cent respectively. The growth is expected to be even higher over the next few years, with the High Level Committee on Infrastructure headed by the Prime Minister estimating an investment of Rs 14,50,000 crore in the 11th plan to develop world class infrastructure. This would need a substantial increase in spending on infrastructure by both the public and private sectors from the current levels of 4.6 per cent of GDP to almost 8 per cent.

Marginal farmer may have to depend on non-farm income

Endowed with the mighty responsibility of controlling prices, RBI has recognised stagnation in agricultural output as a major source of inflation. Seeing increasing agricultural output as the only way to ease the situation, it has rehashed in its Annual Report 2006-07 what the government and experts have been recommending for agricultural growth for the past 60 years, but are far from achieving. Among a host of other recommendations with a view of achieving 4 per cent growth in agriculture, as per the 11th plan target, it calls for a revolution in poultry, dairy, horticulture and fisheries production along the lines of the green revolution. It reveals that small and marginal farmers might have to depend upon non-farm sources of income in the future, and recommends thrust on food-processing and other rural industries will be critical in betterment of living standards in rural areas. This implies that farming might become unsustainable for small and marginal farmers in future.