Economic growth expected to be main RBI concern

Economic growth expected to be main RBI concern
Comment E-mail Print Share
First Published: Wed, Oct 22 2008. 11 19 PM IST

 In focus: Reserve Bank of India governor D. Subbarao. Tomohiro Ohsumi / Bloomberg
In focus: Reserve Bank of India governor D. Subbarao. Tomohiro Ohsumi / Bloomberg
Updated: Wed, Oct 22 2008. 11 19 PM IST
New Delhi: When Reserve Bank of India (RBI) governor D. Subbarao reads out the mid-term monetary policy statement on Friday, concern about inflation, which dominated monetary and fiscal policy measures in the last one year, is likely to have been replaced by worries about economic growth.
In focus: Reserve Bank of India governor D. Subbarao. Tomohiro Ohsumi / Bloomberg
A confluence of recent developments, such as a slowing economy, a cash and credit crunch and declining oil and commodity prices, has led to the change and left economists and bankers unfazed about the Union government’s expanding fiscal deficit and borrowing plans.
Such developments have partially offset the alarm with which the impact of worsening fiscal deficit on inflation might have been viewed normally, they said.
In the last month, the government has lowered its forecast for this fiscal year’s economic growth. Simultaneously, other organizations making forecasts have also marked down economic growth, often by a bigger magnitude than the government.
The economic slowdown is expected to compress the economy’s aggregate demand, a measure that was the RBI’s target all year through monetary policy measures to rein in escalating prices.
The economic slowdown has been accompanied by increasing concern with which lenders across the world view companies’ business operations. Credit has dried up for Indian companies abroad and ,within India, banks show no signs of immediately reducing lending rates. In a tight operating environment, few companies have the space to increase prices, economists said.
On Wednesday, the macroeconometric model of the Delhi School of Economics and the Institute of Economic Growth (IEG) marked down the economic growth for 2008-09 by 60 basis points to 7%. The finance ministry earlier in the month marked it down by 25 basis points to 8%. One basis point is one-hundredth of a percentage point.
Given the overall direction of forecasts of economic growth—downwards—there is slim chance of demand galloping ahead of supply and thereby pushing up price levels, said N.R. Bhanumurthy, associate professor at IEG.
Even the government’s formal announcement this week that it would incur an additional cash expenditure this year of Rs 1.05 trillion, about 80% of the budgeted fiscal deficit, is unlikely to boost demand to the extent that it could be considered inflationary, Bhanumurthy said.
“The global financial crisis is exerting pressure on all economies and perhaps it’s likely that we may overshoot the budget estimates (of deficit),” finance minister P. Chidambaram said at a conference in New Delhi on Wednesday.
The budget target is a fiscal deficit level of 2.5% (not including off balance sheet items such as oil bonds) of gross domestic product.
Comment E-mail Print Share
First Published: Wed, Oct 22 2008. 11 19 PM IST