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Washington: The Indian
economy appears to be back to the growth trend before the global
financial crisis with particularly strong GDP growth over the
first half of the 2010-11 fiscal, but inflation is worrying, the
World Bank has said.
The Reserve Bank of India (RBI) is likely to continue its policy
of cautious rate hikes in an uncertain environment, the World Bank
said in the second of its semi-annual series of India Updates
released Tuesday.
The signals are not clear whether core inflation is caused by more
general demand pressures, which would best be addressed with more
aggressive policy tightening, or by second round effects of
earlier food and commodity price shocks, for which the current
monetary policy stance is likely to be adequate, it said.
The December 2010 Update notes that India's agricultural sector
bounced back strongly after the 2010 monsoon brought normal levels
of rainfall, and the industrial sector registered double-digit
growth for three consecutive quarters.
Inflation came down to 7.5 percent in November but then
accelerated again to 8.4 percent in December because of a renewed
food supply shock, it said.
The current account deficit in the 2009-10 fiscal year was the
largest ever in dollar terms and the monthly deficit widened
further during the first half of the 2010-11 financial year, but
the trend then reversed with import growth slowing and export
growth accelerating in September-December 2010.
With the significant inflation differential between India and its
trading partners, the rupee's real effective exchange rate (REER)
strengthened, the update said.
On the fiscal side, massive windfall revenue from wireless
spectrum auctions and buoyant tax revenue are likely to be offset
by two supplementary spending bills. Monetary policy tightening
continued with increases in policy rates, it said.
Looking forward, the GDP growth looks set to regain the pre-crisis
trend of around 8.5-9 percent in this financial year and the next
(2011-12).
Assuming that the December resurgence in food inflation is
temporary, overall wholesale price inflation is likely to
decelerate to seven percent by end of March 2011 and further
during the coming fiscal year, although uncertainty over
international commodity prices persists, it said.
The widening trade deficit during the first half of the year could
result in a current account deficit around 3.5 percent of GDP in
the 2010-11 fiscal year, although the recent decline in the trade
deficit augurs well for the coming year. Capital inflows are
expected to cover this gap in the current year, the update said.
The RBI is likely to continue its policy of cautious rate hikes in
a highly uncertain environment. While inflation has become more
broad based, capacity utilisation, industrial production, import,
and credit indicators do not point to overheating, the update
said.
The signals are therefore not clear whether core inflation is
caused by more general demand pressures, which would best be
addressed with more aggressive policy tightening, or by second
round effects of earlier food and commodity price shocks, for
which the current monetary policy stance is likely to be adequate,
the bank said.
(Arun Kumar can
be contacted at arun.kumar@ians.in)
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