The Reserve Bank of India's annual report for 2009-10 focusses on the interlinked nature of the current macroeconomic challenges and the policy actions, particularly on the food inflation front. Following the global crisis, economic growth in India has been uneven. In response to a sharp deceleration in the second half of 2008-09, the central bank introduced a comprehensive range of conventional and non-conventional measures to limit the impact of the global crisis. The accommodative fiscal and monetary policies were continued until the first half of 2009-10. Thereafter, although there was a smart recovery, inflation started becoming a major concern, calling for all-round monetary and fiscal measures. The task of simultaneously nurturing recovery and anchoring inflationary expectations has been extremely challenging. Food inflation that had started rising in response to the weak kharif production, turned out to be more persistent in the second half of the year. Headline inflation, which remained at or close to double digits for over four successive months in 2010-11, has become more generalised. Even over the near term, it is necessary to look for solutions beyond monetary policy. Addressing structural constraints in several critical sectors is necessary to sustain growth and also contain supply side risks to inflation. Improving the macroeconomic environment depends on fiscal consolidation, a low and stable interest rate regime, strengthening of the financial stability network, and progress on structural reforms. The RBI's unrelenting focus on inflation is noteworthy.
One key message is that the impact of deficient monsoons on growth is weakening, whereas their impact on inflation still remains significant. That would suggest urgent steps to boost farm productivity and being more open to importing food and other essential items wherever necessary. The need for a coherent medium term strategy of fiscal consolidation has been highlighted once again. The persistent, large fiscal deficit poses a severe risk to macroeconomy over the medium term. During 2009-10, trade deficit was lower as imports shrunk along with exports. The deficit on the current account, however, widened due to a fall in invisibles. Capital inflows continue to be important for the balance of payments. Policymakers will have to be keenly attuned to the fast changing global environment. Financial inclusion and promoting financial literacy have become critical, since the country is up against the daunting task of stepping up its growth potential. A combination of structural reforms and judicious fiscal policy can lift the growth rate to double digits.
