Deficient monsoon to worsen price situation, govt deficit: RBI

Mumbai, Aug 27 (PTI) The Reserve Bank on Thursday warned
that deficient monsoon and poor farm output will worsen the
inflationary situation, besides putting pressure on the
government to raise expenditure on subsidies and other relief
measures.

"Deficient monsoon and the possible adverse effects on
agricultural output may not only put pressures on food prices
but also increase the demand for more subsidies and relief
measures," the RBI said in its annual report for 2008-09.

Finance Minister of India Pranab Mukherjee had earlier
said 252 districts out of a total of about 600 are hit by
drought which could lead to decline in kharif (summer crop)
output by 15 to 20 per cent.

RBI report further said that Wholesale Price Index-based
inflation, which has been in the negative for past 11 weeks,
will turn positive in October with the base effect expected to
fade gradually. Inflation soared to 12.9 per cent during
October last year.

Noting that prices of food continue to remain high, the
report said, "the supply side of food management would assume
critical significance for the government."

Measures to mitigate drought by further expanding public
expenditure and importing essential commodities to supplement
domestic supply, it added, would put more pressure on the
expansionary fiscal situation. MORE PTI CS
SDE


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The RBI report further said that large borrowing
programme of the government would not only worsen the
inflation situation but will also put pressure on interest
rates.

"Large borrowing programmes and high fiscal deficits
complicate the challenge even further by accentuating
inflationary expectations, which could worsen the actual
inflation situation over time while also putting upward
pressure on interest rates," it said, pointing out various
challenges before the RBI in the days ahead.

The government's market borrowing programme for the
current fiscal has been pegged at Rs 4.51 lakh-crore, up from
Rs 3.1 lakh crore in the previous fiscal.

On returning to nine per cent economic growth trajectory,
the RBI report said, "It would largely be determined by the
country's structural fundamentals and the responsive macro
policy environment."

Having registered an average growth of nine per cent
for the three years ending March 2008, the economic growth
rate slipped to 6.7 per cent in the last fiscal, mainly on
account of the global financial crisis.

Deficient rainfall and consequent impact on farm output
is likely to further depress the economic growth rate during
the current fiscal.

The RBI has pegged the economic growth rate for the
current fiscal at six per cent with upward bias. MORE PTI CS
SDE

The central bank said that its accomodative monetary
policy stance, if sustained longer, entails the risk of higher
inflation.

Also, an expected gradual recovery in growth and the
emergence of inflationary pressures by the end of the year
pose difficult challenge for the conduct of policy," RBI said.

The unemployment effects of a long phase of economic
slowdown suggested that the government's preparedness to deal
with such situations should be strengthened, it added. PTI DU
SDE


The information contained in this electronic message and any attachments to this
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