The Reserve Bank of India (RBI) on Thursday said the economy was emerging from a rocky stretch with a reversal in the corporate investment cycle, along with improvement in macroeconomic pointers like fiscal deficit and inflation.
In its annual report for 2013-14 (year ended June 30), the central bank drew confidence from a stable government at the Centre.
The report said forward-looking surveys and economic indicators along with rising business confidence provided hope that the decline in private corporate investment “could be arrested” in 2014-15 and fresh investments of over Rs 1.2 lakh crore “could be realised”.
The report also said the economy was “poised to make a shift to the higher growth trajectory” and pegged gross domestic product growth at 5.5 per cent, compared with sub-five per cent rates in the past two years.
The forecast is unchanged from the prediction earlier this year and is in line with most economists, but below the predictions of the government, which is expecting the economy to expand by 5.8 per cent this financial year.
The RBI noted the current financial year had started on a promising note, with industrial production beginning to look up and the inflation rate growing at a slower pace than last year.
“The economy may grow faster than in the previous year, with acceleration in mining, manufacturing, construction & trade, hotels, transport and communication sectors,” the RBI said, adding these sectors accounted for 50 per cent of GDP.
Similarly, the eight per cent target for inflation by January 2015 is also seen within reach, though the report said there were upside risks to the six per cent targeted to be achieved by January 2016.
The central bank noted that the retail inflation rate had come down and indicators of manufacturing and services activity were strong. Also, the monsoon season had recovered to reach a rainfall level closer to normal, the report said.
The biggest comforting factor for the central bank comes from the fiscal deficit. The government is showing a resolve to bring down the deficit, which reached a record high during the previous government’s tenure. The fiscal deficit target for this financial year is set at 4.1 per cent of GDP.
“The fiscal deficit is likely to reduce further in 2014-15. The budgetary targets are realisable, though concerted efforts are necessary to achieve these targets,” the RBI said.
On the external front, the central bank sees the Indian economy “far more resilient” now due to moderation of current account deficit and a stable rupee, but it warned against market disturbence in the event of quicker monetary tightening by advanced economies.
“An increase in interest rates in the US may trigger a reversal in carry-trade flows to emerging-market economies, leading to higher volatility in the forex, equity and bond markets,” the RBI report said. “The rebuilding of foreign exchange reserves in recent months will help India buffer the economy against potential shocks,” the report added.