NEW DELHI: High inflation poses a big threat to growth as it would impair the ability of the Reserve Bank to cut interest rates to boost economic activities, a Finance Ministry document said.
“The outlook on growth is…Threatened by certain downside risks; the biggest of them being the high rate of inflation, which further dents the ability of the RBI to extend monetary policy support to growth revival,” it said.
The Reserve Bank has maintained a hawkish policy stance and raised a key interest rate by 0.25 percent in its latest monetary policy review with the aim of taming inflation.
The ministry underlined the need to contain wholesale price inflation at below 6 percent “so that necessary leeway is available to the RBI to support economic recovery.” WPI inflation was 6.16 percent in December. The RBI is scheduled to announce its next policy in April.
On the positive side, however, the ministry maintained that the government’s recent initiatives could help to place India on a high growth path.
“…The recent structural reforms undertaken by the government of India are likely to place the economy on a higher potential growth path, from where acceleration to a higher growth trajectory can occur reasonably quickly, once global recovery gains momentum and cyclical upturn strengthens,” the document added.
India’s economic growth slipped a decade low of 4.5 percent in 2012-13. The country’s GDP is estimated to expand 4.9 percent in the current financial year.
Referring to the current account deficit (CAD), the ministry said it was likely to come down to USD 50-55 billion in this financial year from an all-time high of USD 88.2 billion in 2012-13.
The government as well as the RBI took a slew of measures, including curbs on gold imports, to bring down CAD, which had affected the value of the rupee and contributed to inflation.
Highlighting the need to curtail the fiscal deficit, the document said it should be done while protecting capital expenditure.
On the manufacturing sector, the document said “it is sine qua non for raising the growth rate and sustaining it over the medium term. Continuing the recent initiatives of the government to speed up project implementation and boost investment will help.”