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RBI's FY05 annual report: Key excerpts

Sep 2, 2005

The apex bank, once again, in its annual assessment of the economic performance (summarised in the <>RBI annual report), evinced confidence in the country's inherent growth capabilities and cited 'acceleration in overall economic activity, increasing business confidence, export competitiveness and a pick-up in investment intentions' as the underlying pillars. Following are the key excerpts of the said report. Review FY05

The RBI has acknowledged that the setbacks from an uneven and deficient monsoon and high international crude oil prices in FY05 had tempered the robust resurgence of growth that had been achieved in FY04. Although real GDP growth slowed to 6.9% in FY05 in contrast to the 8.5% growth seen in FY04, the assessment of the overall macroeconomic performance seems positive.

Manufacturing led IIP: The index of industrial production (IIP) accelerated from 7% during FY04 to 8.2% during FY05, led by the manufacturing sector (9% YoY growth). The upturn in industrial activity was supported by a positive investment climate, business confidence and buoyant external demand. Also, the robust financial performance of corporate India added significant momentum to the economy's growth engine. However, it was the services sector that anchored the growth process during the year, contributing as much as 71% to the real GDP growth in FY05.

Credit heavy banks: With an incremental credit deposit ratio of 133% in FY05 (50% in FY04), banks enjoyed a high rate of offtake from both retail and corporate segments of their credit book. It is, however, interesting to note that the figures for sectoral deployment of bank credit indicate that the priority sector was the largest recipient of bank credit. This was essentially on account of substantially higher offtakes in the home loans (upto Rs 1 m) segment (driven by fiscal incentives) and credit to SMEs (small and medium enterprises). However, lack of deposit mobilisation and lower investments in G-Secs (which the banks have the option of offloading to raise funds) may create paucity of funds to sustain credit growth going forward.

Inflation the possible dampener: Although inflation rates at the consumer's level (measured by the Consumer Price Index) remained relatively benign in FY05, the headline inflation (measured by the Wholesale Price Index) continued to surge upwards, driven by lagged adjustments to international prices of coal, petroleum products, iron ore and metals. Albeit the fact that the impact of the same is yet to filter into the CPI (due to the government's generous subsidisation), the narrowing down of the 'gap' remains a possible dampener to the economy's future growth trajectory.

Preview FY06

Real sector: Liberalisation of policies in regard to direct investment abroad is expected to encourage consolidation of Indian industries and enable them to reap the benefits of economies of scale and wider reach. This will also impart a high degree of competitiveness to the Indian corporates. However, the apex bank has also pointed out that there are a host of infrastructural bottlenecks that could impinge upon competitiveness and the supply elasticities to meet the emerging global and domestic demand. In this context, it vouched for pass-through of higher international crude oil prices to domestic prices (i.e. de-subsidisation). This will also enable more efficient use of oil in the economy, especially in view of the fact that the rise in international oil prices appears to have a large permanent component.

Financial sector: Given that the gross fiscal deficit to GDP ratio stands at 4.1% in FY05, the Fiscal Bill target of reducing the deficit to 3.0% of GDP by FY09 appears to be within striking distance. However, with the revenue deficit at 2.6% in FY05, the elimination of the revenue deficit by FY09 seems to be a difficult target.

External sector: India's merchandise exports have risen at over 20% per annum during FY02 to FY05. This positive development in the external sector provides basis for further rationalisation of tariffs and simplification of customs procedures in line with global practices.

The apex bank has best summarised the economic outlook for FY06 in the following statement, "Maintaining macroeconomic and financial stability in an environment of sustained high growth of the economy in the future, would critically depend on policies relating to oil prices, diversification of agriculture, improvement in urban infrastructure, determined measures for fiscal consolidation and, above all, on the continuation of the positive investment climate in the country."

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