The report, released on Monday, said the "durable pick-up in the investment activity remains elusive", adding that no strong drivers – that could engineer an industrial turnaround – is at sight and export demand remains anaemic.
India's growth is under pressure with industrial activity decelerating with no drivers for a turnaround at this juncture and investment activity remaining elusive, hinging on the growth projection of 7.6% in 2016-17 on the possibility of the Seventh Pay Commission boosting the demand along with better-than-anticipated agriculture production, says the annual report of the Reserve Bank of India (RBI).
The report, released on Monday, said the "durable pick-up in the investment activity remains elusive", adding that no strong drivers – that could engineer an industrial turnaround – is at sight and export demand remains anaemic.
In the wake of contraction in industrial activity caused by the manufacturing sector, the RBI will stick to its inflation target of 4%. "The short-term macroeconomic priorities of the RBI continue to focus on bringing down inflation towards the government's target of 4%; thus far the RBI has followed a gentle glide path, aiming at 5% by March 2017 after having coming below 6% in January 2016," said governor Raghuram Rajan Rajan in his foreword.
Rajan said that India's economic growth is below potential. Key weakness is in investment with corporate investment subdued because of low capacity utilisation. Public investment, he said, was slow in rolling out in some sectors. Inflation projections, he said, are still at the upper limits of RBI's inflation objective. With the central bank needing to balance savers' desire for positive real interest rates with corporate investors' and retail borrowers' need for low nominal borrowing rates, the room to cut policy rates can emerge only if inflation is projected to fall further.
While praising the government's efforts, Rajan said, there has been a significant improvement in roads with respect to new constructions, especially in the national highways network. Ports have recorded the highest ever capacity utilisation in a single year. "We saw the highest ever annual capacity addition in solar and wind energy segments," the outgoing central bank governor said. "The business sentiment has improved in response to initiatives like Make-in-India."
Report added that a significant improvement in corporate profitability, essentially on account of saving on input costs and more recently on sales growth, is expected to boost corporate saving and translate into investment spending going forward. "Record inflows of foreign direct investment and the surge of initial public offerings after a four-year lull seem to be providing lead indications of this tipping point," report added.
The passage of the Goods and Services Tax (GST) is unlikely to impact inflation of 54% of the items consumer price index basket are exempt from GST. However, the report said the actual impact on inflation would be determined by the rate of the GST.
The report said GST would boost trade, investment and growth by reducing supply chain rigidities and would cut down transportation cost. It would eliminate the cascading impact of taxes on production and distribution cost improving the general competitiveness of the economy, marking an era of fiscal federalism and growing political consensus for economic reforms.
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