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A balanced scorecard

On the face of it, there is nothing substantially new in the Reserve Bank of India's Annual Report 2004-05 on the state of the economy. The annual report has the dual role of reviewing the macro economy and discussing the working of the central bank during the year. As in the past, while exercising the former function, the RBI has to necessarily supplement the views expressed in its earlier statements, notably, the Annual Credit Policy (May 2005) and its quarterly reviews. Far from being an avoidable duplication however, the annual report brings up to date the central bank's assessment of the economy in the light of more recent developments. There are no changes in the Bank's earlier forecasts of the rate of either real GDP growth for the year or of inflation. They remain at 7 per cent and between 5 and 5.5 per cent respectively. Again, it is not for the first time that the central bank has highlighted the deleterious consequences to the economy arising out of the relentless surge in global oil prices. Yet at a time crude prices have crossed $ 70 a barrel and, perhaps more importantly, it is realised that they will remain high, their implications need renewed emphasis. In fact, the central theme of this report seems to be the soaring oil prices and the Government's inability or reluctance to pass on the burden to domestic consumers. Already government finances have come under a severe strain. The public sector oil companies have seen their profitability erode and will not be in a position to contribute to the exchequer by way of dividends. Although during 2004-05 the twin challenges of high oil prices and subnormal monsoons could be successfully met, there can never be a let up of the constant vigil on the price front. No doubt the impact of high oil prices particularly on the poor needs to be moderated through fiscal reliefs and prevented from causing wage-price spirals. But domestically, the manoeuvrability is getting limited and it may not be possible to contain the inflationary potential of high international prices any more.

Monetary conditions have remained easy. An overhang of excess liquidity can further complicate pricing pressures on the economy. On the supply side, the final verdict on current monsoon is not yet out. There is some uncertainty over the kharif crop. There are of course a number of positive features: optimistic investment climate, stable interest rates, continuing momentum in the services sector, and a satisfactory external account. The balance of payments has been able to withstand the surge in trade deficit caused by the sharply higher oil import bill as well as the increase in other imports. On balance, prospects for economic growth look good. Maintaining macro economic stability in an environment of sustained high economic growth would depend critically on policies relating to oil prices, determined measures for fiscal consolidation, and above all sustaining a positive investment climate in the country.

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