But even growth in the 5-6 per cent range, based on emerging signs of revival in industrial and construction activities, may face risks from the sub-normal monsoon and the geopolitical situation in the Middle East. Also, a considerable degree of micro-management of recovery process would be required with a sense of urgency, such as lowering high food inflation through supply-side management.

RBI’s assessment and prospects for the economy in 2014-15, in its annual report, centre on greater political stability at present, the Modi Government’s commitment to fiscal consolidation, strengthening of the monetary policy framework and better policy implementation. Also, it notes, the “disinflationary momentum” that set in since December 2013 has taken inflation to a lower trajectory, broadly in line with the RBI projections of CPI at 8 per cent by January 2015 and 6 per cent by January 2016.

RBI, however, makes it plain that inflation though moderating “remains above the level that could secure sustainable growth” and, therefore, monetary and fiscal policies need to maintain “caution” during 2014-15 so that the gains in macro-stability are preserved and the disinflationary momentum gathers traction.

On the other hand, the Finance Ministry sounds more optimistic to peg growth at 5.8 per cent this year and equally looks for inflation moderating further, giving room to the Reserve Bank of India (RBI) to soften interest rates. (The fourth bi-monthly Monetary Policy statement is due on September 30).

RBI points out inflation was still at 8 per cent in July, though largely from shooting up of vegetable prices on the back of deficient rainfall, and it led to a significant inflation build-up in select components.

The central bank holds that after seeing CPI touch double digits for the last six years, “establishing a credible nominal anchor to rein in inflation and anchor inflation expectations assumes importance” for sustained growth of the economy. “Flexible inflation targeting and financial stability are not mutually exclusive goals and low inflation helps secure monetary as well as financial stability” it adds. All this does not suggest, on present trends, any early easing of monetary policy with a cut in the repo rate.

How the economy fares from now on, with seven months to go in current fiscal year, cannot be predicted with certainty. Finance Secretary Mr Arvind Mayaram, cites “green shoots of recovery”, pro-growth budget initiatives and a Government determined to meet the fiscal deficit target of 4.1 per cent of GDP this year.

The recent softening of international oil prices has raised new hopes of Government at last relating retail oil prices including diesel to the market trends. The Finance Ministry has not ruled out possibility of Government exiting the diesel subsidy “soon”, with its marked effect for subsidy reduction. The central bank’s annual report also calls for “quick pass-through” of global crude oil price changes to domestic prices of petroleum products so that oil subsidies are kept at the budgeted level. This certainly would have a significant impact for the process of subsidy reduction, which is important for achieving fiscal deficit target.

Though Government has referred the issue of taming subsidies to the newly set-up Expenditure Commission, RBI feels early measures for more flexible domestic prices of diesel, liquefied petroleum gas (LPG) and fertilisers are warranted. Mr Mayaram is confident of the softening trend (from 110 to 102 dollars a barrel) enabling Government to exit the diesel subsidy “soon enough” and diesel becoming market-priced.

Movements in oil prices are dependent, to a large extent, on geopolitical developments in Middle East and adjoining region including Gulf countries, so far immune to any reverberations from the turmoils, but if lower prices continue for longer, oil-importing nations like India should certainly move toward market-based system of pricing of oil products. Fluctuations would affect industrial and individual consumers and impact on the general price level, a contingency which has to be met through conventional instruments of policy.

In fiscal policy, the RBI assessment considers it both “feasible and reasonable” to lower the GFD (gross fiscal deficit) ratio to 3.6 per cent in 2015-16 and further to 3.0 per cent in 2016-17, as per the road map proposed by Finance Minister Mr Arun Jaitley in his budget speech. But the revenue deficit would prove difficult and would require further expenditure cuts and better targeting of subsidies, according to RBI.

On a medium-term view for India’s economy, RBI suggests securing a sustainable growth of at least 7 per cent, for which microeconomic policies and reforms that improve activity levels and productivity would be needed in tandem with a supportive macroeconomic regime. A reasonably positive real interest rate, low inflation, moderate CAD and low fiscal deficit are among policies listed while reforms would cover industry, services, international trade, labour markets, public sector management, financial markets and competition.

In the current year, some acceleration in mining, manufacturing, construction and trade, hotels, transport and communication sectors are assessed to account for 50 per cent of GDP compared with about 15 per cent in case of agriculture, forestry and fishing, and electricity. Other indicators pointing to recovery are automobile sales, railway freight traffic, cargo handled at ports and foreign tourist arrivals.

On the external sector, the current account deficit has been significantly lowered to sustainable level and the rebuilding of foreign exchange reserves would be a buffer against potential shocks. However, a probable advancing of monetary policy normalization in USA in particular carries some risks for emerging economies.

Dealing with fiscal policy, RBI takes the view while there is scope to widen tax base and improve compliance, raising taxes may not result in dynamic optimisation of revenues as it could disincentivise savings, investment and growth.

The Modi Government is still wrestling with States for a consensus on GST which would become the most important tax reform, maybe from the next fiscal year. But for the budgeted non-tax revenues, particularly disinvestment of a large magnitude proposed, RBI suggests engaging professional merchant bankers with proven track records who could quickly handle the processes involved and help achieve the target. In this context, RBI has also thrown up the idea of privatization of some public enterprises which are not yielding due returns. (IPA Service)