RBI projects 6.5-7 pc GDP growth

Gross domestic product (GDP) growth has been pegged at 6.50-7 pc with an upward bias. It may be recalled the annual statement on monetary and credit policy released on April 29, 2003 projected a real GDP growth of six per cent for 2003-04.

The forecast on GDP growth for 2004-05 has been made on the assumptions of a sustained growth in the industrial sector, normal monsoon and good performance of exports. ‘‘The realisation of such a rate of growth would signify a structural acceleration in growth rate of the economy,’’ Dr Reddy said.

In its Report on Macroeconomic and Monetary Developments in 2003-04, the central bank said that indications of an improvement in the investment climate are getting clearer and a robust business optimism is permeating Indian industry. It said that the rate of gross domestic capital formation (GDCF) increased to 23.3 pc of GDP in 2002-03 (23.1 pc) solely because of the increase in the rate of investment of the household sector.

On inflation, RBI said: ‘‘Given the ‘pass through’ of international price trends to domestic inflation, the inflation rate during 2004-05 is likely to be influenced to a significant extent by international oil prices and trend in commodity prices’’. However, it was pointed out by Dr Reddy that ‘‘we are back to the April position. In April 2003, the estimate was 5-5.5 per cent. That means our estimate of inflation now as compared to April last year is more benign’’.

Inflation — as measured by variations in the wholesale price index (WPI) on a point-to-point basis — declined to 4.5 pc by end-March 2004 from 6.5 pc at end-March 2003. The reduction in inflation during 2003-04 reflected lower price increase in primary articles and in the fuel group.

With regard to prices, Dr Reddy admitted the there was an overhang of problems on account of oil prices and large domestic liquidity, partly reflecting global liquidity.

The policy also underscored the need to overcome the bottlenecks in the flow of bank credit to agriculture and small- and medium-enterprises (SMEs). More importantly, a steep step-up in investment activity in infrastructure, whether in public or private sectors, which would augment the prospects for credit off-take for productive sectors. While the growth in consumer credit and housing credit have contributed positively to the economy so far, the quality and the pace of such growth in future need attention.

To boost infrastructure financing, banks have been allowed to raise long-term bonds. These bonds are to have a minimum maturity of five years and to the extent of the exposure of residual maturity of more than five years to the infrastructure sector.

Banks have also been asked to align the pricing of bank credit to corporates to the assessment of credit risk to improve credit delivery and credit culture.