The Reserve Bank of India (RBI) annual report which takes a comprehensive look at the economy has warned of a tough 2011-12. It remains hawkish on inflation and worried about growth. In the near term it asks the government to qualitatively improve fiscal consolidation. In the long term it questions the 12th plan’s 9% GDP target and says much will have to be done to improve the economy potential growth. CNBC-TV18's Latha Venkatesh reports on what this means for the rate scenario going ahead? Going by the hawkish overtones, it is quite possible that the Reserve Bank of India will hike rates. It says that in FY11 fiscal deficit came down to 4.7% from 6.5% in the earlier year only because of one of reasons and a cyclical upturn in the economy created by fiscal stimulus, without that they would not have been able to achieve it. It points out that the level of expenditure by the government actually created aggregate demand and made monetary policy’s task of bringing down inflation much more difficult. Going from current assessment it also points out that capital outlay of the government is coming down. “Even at a time when the expenditure was way up high and fiscal deficit was high, capital outlay as a percentage of GDP in FY11 actually declined to 12.9% from the earlier years’ 13.8%,” the report said. It says that any enthusiasm of 9-9.5% brought about by the 12th plan’s targets needs to be smothered as already there is a global growth scare. If you want 9-9.5% growth the current 33-33.5% savings rate should increase to 38% or thereabouts, so increase by 5% points and the investment rate should go to 40.5% only then that is achievable. So, at the moment potential of the economy needs to improve before you get such dreams.
Moneycontrol
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