Giving a gloomy picture, the Reserve Bank of India (RBI), on Monday, said that growth outlook remained weak and inflation was likely to be sticky during 2012-13. The central bank has also asked the government to curtail subsidies and provide an investment stimulus.

“The suppressed inflation of the past is likely to show up in electricity, coal and fuels during 2012-13. On the whole, in spite of core inflation pressures moderating and some deceleration in wage inflation, upside risks to inflation projections for 2012-13 remain significant,” RBI said in its Macroeconomic and Monetary Developments first quarter review 2012-13, which serves as a backdrop to the first quarter review of Monetary Policy Statement 2012-13.

Further, the RBI said that the impact of the rupee depreciation against the U.S. dollar would limit the favourable impact from a fall in global crude oil and metal prices. The RBI’s views are likely to negate the expectations that the central bank is likely to cut rates to stimulate growth when it reviews first quarter monetary policy of the current financial year on Tuesday.

Investment climate

The RBI asked the government to improve the investment climate by moving quickly to address bottlenecks in infrastructure space and remove constraints on foreign direct investment (FDI).

“Inflationary pressures have persisted, with significant contribution from food and energy segments. Inflation expectations also remain sticky. Going forward, the decline in global commodity prices will provide some relief, but the gains have been partly offset by rupee depreciation,” said the RBI.

Risks to inflation remained due to unsatisfactory monsoon and increases in Minimum Support Price (MSP) even as growth slowdown eased demand pressures. While core inflationary pressures were currently muted, a continued rise in real wages might spill over to core inflation, it said.

Near-term outlook

The apex bank said that the near-term outlook on inflation continued to be marked by a number of upside risks, despite the significant slowdown in growth. “Even though inflation declined during the latter part of 2011-12, the persistence of inflation in recent months above the 7 per cent mark points to the sticky nature of inflation.”

The RBI also said that the slowdown had extended into the first quarter of 2012-13, and output expansion in 2012-13 was likely to stay below its potential. “Newer risks to growth have arisen from slowing global trade, domestic supply constraints, bottlenecks of industrial inputs, particularly with regard to coal and electricity and less-than-satisfactory monsoon so far.”

Until July 27, 2012, the monsoon was deficient by 21 per cent compared with the long period average. In terms of the Reserve Bank’s production weighted index, the deficiency was 24 per cent. “This is likely to impact kharif crops, especially coarse cereals and pulses.”

Survey

The order books, inventory and capacity utilisation survey shows a seasonal improvement in capacity utilisation levels in the fourth quarter of 2011-12, but the industrial outlook survey indicates that capacity utilisation has declined in the subsequent quarter. These surveys are conducted by the Reserve Bank.

The RBI also said that the services sector growth was showing signs of deceleration in line with slowdown in industrial growth and weak global economy. It said that investment outlook remained sluggish. Investment intentions in new projects sanctioned financial assistance moderated to Rs.2.1 lakh crore in 2011-12 from Rs.3.9 lakh crore in 2010-11. Corporate investment was expected to decline further during 2012-13, it added.

The fiscal deficit target for 2012-13 is at a risk of being breached due to likely overshooting of subsidies and shortfall in receipts. To address this risk, the RBI said fiscal space needed to be created by curtailing subsidies and significantly boosting government capital expenditure to provide an investment stimulus to the economy.

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