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Economy is now at a critical juncture: RBI

Pushes for investment stimulus through large capital spending

Written by ENS Economic Bureau | Mumbai | Published: July 31, 2012 1:25:45 am

Hinting that key interest rates are unlikely to be lowered in the monetary policy review on Tuesday,the Reserve Bank of India (RBI) on Monday said inflationary pressures “have persisted,with significant contribution from food and energy segments”.

In its report ‘Macroeconomic and monetary developments: First quarter review 2012-13’,unveiled on the eve of the quarterly policy review meeting,the RBI warned of “macro-economic risks that emanated from lack of momentum in fiscal consolidation”.

While,urging for an investment stimulus through large capital spending to rev up growth,the RBI cautioned the government that it must curb spending and contain the deficit.

“Speeding up fiscal consolidation by putting in place an investment stimulus through large capital spending by the government but offsetting it by curtailing revenue spending by revamping the subsidy schemes could go a long way in reviving growth,” it said.

Reviving infrastructure investment while addressing increased risks to lending to this sector is critical in this context,it said. The central bank also sought the removal of constraints on foreign direct investment (FDI) and “decisive policy action” backed by credible commitment to a long-term strategy for correcting macroeconomic imbalances and stimulating investment.

“Economy is now at a critical juncture,” the RBI said,where revival can be supported by restoring confidence through policy actions to encourage investment.

Maintaining that inflation is likely to be sticky during 2012-13,the RBI said,“Inflation and macro-risks will condition growth-enabling policy actions with a view to supporting recovery in a non-inflationary manner.” The near-term outlook on inflation continues to be marked by a number of upside risks,despite the significant slowdown in growth. Surveys of business expectations confirm that confidence levels are low,it said.

On growth,it said “Available information suggests that slowdown has extended into Q1 of 2012-13,and output expansion in 2012-13 is 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. Forecasters have lowered India’s growth rate forecast for 2012-13 to 6.5 per cent from the earlier 7.2 per cent on back of high inflation and deficient monsoon,it said.

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