Mumbai /New Delhi: The Reserve Bank of India (RBI) warned on Thursday that a poor monsoon season, which has seen about 40% of the country’s districts declared drought areas, is more likely to drive inflation than curb growth.
A day after food prices clocked a 13.3% surge for the 12 months to 15 August even as India’s wholesale price index fell for the 11th straight week, the RBI said policy makers face a dilemma over the timing and pace of exiting from an accommodative monetary stance.
Its warning tone on price pressures comes after many analysts have scaled down growth projections and pushed their expectations for policy tightening further into 2010 on concerns that a drought could cut India’s economic growth by 1 to 2%.
“The deficient monsoon could affect the inflation outlook more than the growth prospects,” the RBI said in its 476-page annual report.
The June-September monsoon rains were 25% below normal as at 26 August, the government said.
The focus of farm policy is increasingly towards accelerated planting of winter crops.
Rupa Rege Nitsure, chief economist at Bank of Baroda, said the RBI was wise to flag the mounting risks posed by pro-growth monetary and fiscal measures, but also said policy makers should provide a roadmap for tightening.
“Inflationary concerns are growing by the day and continuation of expansionary policies in this context is like adding fuel to the fire,” she said.
Union finance minister Pranab Mukherjee cited positive signals in the economy on Thursday, even as rice output was on track for a 15-20% shortfall and 252 of the country’s 600-plus districts are declared drought-hit.
He said economic growth could accelerate to 8% or more in the year ending March 2011. For the current fiscal year India expects growth of 6% or more, compared with 6.7% last year and at least 9% in the previous three years.
Exports remained subdued, falling 28% in July from a year earlier.
A trade group predicted full-year exports would probably hit $167 billion, in line with last year’s $168.7 billion.
Union commerce and industry minister Anand Sharma said India would extend tax breaks for exporters, among other steps to reverse a decline in exports, and predicted a doubling in the outbound sale of goods and services over the next five years.
Industrial output rose by 7% in July from a year earlier, a second straight month of vigorous growth after jumping an unexpectedly high 7.8% in June, and domestic demand has remained robust despite monsoon worries.
Top Indian car maker Maruti Suzuki said it had seen “double-digit” percentage growth in August sales and has not seen any impact so far from drought conditions, although Mayank Pareek, executive officer of marketing and sales, said it might be felt later in the year.
“My guess is the effect (after November) will be there, but will be very marginal effect. If at all it is there, the first hint we will get in November,” Pareek said.
The yield on the 10-year benchmark bond rose 2 basis points to 7.24% right after the release of the RBI report as investors digested the RBI’s hawkish tone on inflation. Stocks closed nearly unchanged ahead of the report.
The RBI did not specify when it thought policy accommodation should start to be withdrawn, but said if it was maintained for too long it could fuel inflation in the near-term and constrain growth over the medium term.
“The emerging inflation outlook and the medium-term consequences of sustained accommodative monetary stance for inflation suggest that timing and pace of exit from the current accommodative policy stance would be a major challenge,” the RBI said in its annual report for 2008-09.
Returning to a high growth path at the earliest remained the key near-term policy challenge, it said, adding a credible action plan on fiscal consolidation was necessary to achieve that.
The government is borrowing a record Rs4.51 trillion ($92 billion) in 2009-10 to fund a fiscal deficit forecast at 6.8% of gross domestic product, a 16-year high, and this could put upward pressure on interest rates, it said.
Last month, the central bank raised its inflation projection for the end of 2009-10 (April-March) to 5% from 4% -- a forecast that analysts say may be too low -- and tweaked its growth outlook to 6% with an upward bias.