Mumbai: India’s financial stability remains potentially at a risk on falling growth, persistent elevated level of inflation and high twin deficits, the Reserve Bank today said in a report.
“…lower growth, elevated inflation, high fiscal and current account deficits remain potential risks to financial stability,” RBI said in its Financial Stability Report December 2012. Finance minister P Chidambaram yesterday had said it was imperative to contain the fiscal deficit—occurs when total expenditure exceeds the revenue—by augmenting resources and controlling expenditure.
For 2012-13, the fiscal deficit has been revised upwards to 5.3 percent, from 5.1 percent in view of increased expenditure and lower-than-estimated revenue realisation. Also, the CAD (current account deficit) in 2011-12 was 4.2 percent and the government expects to bring it down to below 4 percent in the current fiscal.
CAD occurs when a country’s total imports of goods, services and transfers is greater than the country’s total export of goods, services and transfers.
Amid global slowdown and uncertainty, the Indian economy remains sluggish, held down by slowing investment, weakening consumption and declining exports, RBI said.
“The loss of growth momentum which started in 2011-12, extended in the current year with growth remaining below the trend, however, inflation continued to remain above the Reserve Bank’s comfort zone. On the external front, the current account deficit (CAD) remains above the comfort level and the Indian rupee witnessed depreciation pressure, RBI said.
The wholesale price index based inflation declined marginally to 7.24 percent in November from 9.46 percent in the same month a year ago. However, retail inflation for the month moved up to 9.90 percent from 9.75 percent in October.
RBI said various domestic and external factors caused significant deceleration in economic growth of the country in last few quarters. “GDP growth remained low at 5.3 percent during Q2 2012. On the domestic front, structural impediments such as fall in domestic savings, persistently high inflation, regulatory and environmental issues resulting in a fall in investment demand and moderation in consumption spending have contributed to the fall in growth,” it said.
The Reserve Bank has lowered this fiscal’s economic growth projection to 5.8 percent, from 6.5 percent earlier.On external sector vulnerabilities, RBI said, the slowdown in global growth has reduced demand for Indian exports. On the other hand, imports have tended to slow to a lesser extent as the major portion is relatively inelastic (oil imports), it added.
“This could exacerbate the current account deficit. In the face of general risk aversion, financing the CAD has become a challenge. The benefit of a depreciating currency has been muted due to weak external demand which could worsen on materialisation of US fiscal cliff,” it said.
RBI said gold imports have continued to be high and have accounted for over two-thirds of the CAD in the last three years. Reduction in share of financial assets in household savings due to their preference for valuable assets such as gold is putting pressure on CAD, it added.
Gold imports touched a record high last year, pushing up the current account deficit to a historic high of 4.2 percent in the year.