GDP growth will be 5.5%, says RBI

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7% possible in medium term if recovery kicks in

GDP growth will be 5.5%, says RBI
The Reserve Bank of India (RBI) on Thursday kept its economic growth projections unchanged at 5.5 per cent for 2014-15 and said that it is committed to a disinflationary glide path of taking consumer price inflation (CPI) to 8 per cent by January 2015. However, a slowdown in global recovery, geopolitical tensions intensifying or the monsoon weakening again in the rest of the season could act as a dampener.

With greater political stability, commitment to fiscal consolidation, strengthening of the monetary policy framework and better policy implementation, GDP growth is expected to be around 5.5 per cent in 2014-15 from the sub-5 per cent growth in the preceding two years, said the central bank in its annual report for 2013-14.

Signs of improvement in mining and manufacturing, expected pick-up in investment, improved flow of financial resources to the private sector, fiscal consolidation, improved external demand and stabilising global commodity prices are expected to support recovery, said the RBI annual report.

Commenting on the report, Saugata Bhatta-charya, chief economist, Axis Bank said, “The economic projections are realistic. There is an expectation that industry and services would at least partially offset an expected drop in agri output.”

RBI’s report said that during the year, amid slow growth and high inflation, the Indian economy had to contend with serious challenges to external stability emanating from an unsustainably high current account deficit (CAD), capital outflows and consequent exchange rate pressures. The economy grew at 4.7 per cent in 2013-14.

In order to secure a sustainable growth of at least seven per cent over the medium term, microeconomic policies that improve activity levels and productivity would be needed so that they can work in tandem with a supportive macroeconomic regime with a reasonably positive real interest rate, low inflation, moderate CAD and low fiscal deficit, said the RBI.

All India cumulative rainfall deficiency in the current monsoon season till August 13, 2014 was placed at 18 per cent of the long period average (LPA) as against an excess of 12 per cent in the corresponding period last year. Area sown under kharif crops (till August 14) was 2.3 per cent lower than normal but 8.9 per cent higher than the 2009 drought year. Based on the sowing data, it appears that the drop in output may now be restricted mainly to coarse cereals and pulses. The reservoir water levels provide comfort. As on August 13, the level in the 85 major reservoirs was 14 per cent higher than the average over the last 10 years, though it was 12 per cent lower than last year’s level on the comparable date.

The adverse impact of deficient monsoon on growth, inflation, fiscal and trade deficits is expected to be small as in the current reckoning the deficiency in quantitative and qualitative terms is likely to be much less than that in 2009.

However, after the RBI report came out, the latest statistics released by the meteorological department said that the country’s rainfall was 25 per cent below average in the week to August 20.

Retail inflation rose to 7.96 per cent in July from 7.46 per cent in June, and was largely on account of fruits and vegetable items (which increased by 22.48 per cent and 16.88 per cent respectively). Core inflation stood at 7.4 per cent.

The RBI report said that the macro-stability and sustainable growth hinge on several medium term issues such as lowering high food inflation through supply side management, strengthening the monetary policy framework and transmission, fiscal adjustment through revenue augmentation, strengthening infrastructure by improving contractual arrangement for private sector, removing obstacles and improving access to finance and managing the NPA cycle to improve soundness of the banking system.


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