Cautious RBI sticks to GDP growth projection of 8.5%

Not subscribing to the optimism of a 9% GDP growth for 2007-08 by the government, the Reserve Bank of India (RBI) on Tuesday kept its GDP growth projection unchanged at 8.5%. Rooted within the limitations of slackening momentum in industrial and services sectors, the central bank kept the growth targets unchanged. The regulator has also factored in global uncertainties that may moderate the performance of manufacturing as well as services. Finance minister P Chidambaram on Monday said that the economy was likely to expand by 9% this year. The economy has clocked an average of 8.6% over the past four years. The mid-term monetary policy statement said, Real GDP growth in 2007-08 is placed at 8.5% for policy purposes, as set out in the annual policy statement of April 2007, assuming no further escalation in international crude prices and barring domestic or external shocks.RBI governor YV Reddy said, The growth is on track. We expect inflation will end at the level of 5%, subject to the caveat that oil prices are ruling high and a pass-through may occur. The policy noted that real GDP growth originating in agriculture and allied activities has risen above trend in the first quarter of 2007-08. The positive prospects for agriculture augur well for the economy as a whole in terms of both aggregate supply conditions and food prices which, until early 2007, were the main drivers of inflation, the statement said. There are indications that industrial activity continues to be sustained by strong fundamentals. Growth in electricity, a key infrastructural input, has accelerated in the current financial year. The growth of capital goods production has remained strong and higher than headline industrial output growth, suggesting continued capacity expansion. The key driver of the economy appears to be the substantial increase in gross fixed investment in the first quarter of 2007-08, indicative of the strong pace of capacity building underway. In contrast, the growth in private consumption and exports has been relatively modest. Investment-driven growth is supported primarily by saving rates, currently at around 32-33% of GDP and higher by ten percentage points from the beginning of the decade. The Central Statistical Organisation (CSO) data at the end of August 2007, showed that real GDP growth during April-June 2007 at 9.3% as against 9.6% in the corresponding quarter last year. The review also underscored the indications of underlying shifts in the constituents of aggregate demand. While private final consumption expenditure as a proportion to GDP declined, the real gross fixed capital formation (GFCF) increased indicative of the investment led acceleration of growth in the economy. According to the World Economic Outlook (WEO) of the International Monetary Fund (IMF) released in October 2007, the forecast for global real GDP growth on a purchasing power parity basis has been retained at 5.2% for 2007 as in the July 2007 update, down from 5.4% in 2006. The IMF has, however, revised the forecast for 2008 down to 4.8% in October from 5.2% in the July 2007 update. – www.economictimes.indiatimes.com