The Reserve Bank of India (RBI) on Thursday said uncertainty in the progress and distribution of monsoon, a key factor in performance of the farm sector, continues to be a risk for both growth as well as the inflation outlook.
"While the progress of monsoon has allayed initial fears (of a drought), the uncertainty surrounding its progress and distribution remains a risk to the outlook for both growth and inflation," the apex bank said in its Annual Report for 2014-15.
The report said that there is a need to put in place comprehensive and pre-emptive food management strategies to contain the spillovers of a feeble monsoon.
For the first four months of FY16, indicators of real activity have broadly tracked RBI's baseline projection of output growth at 7.6 per cent for the year as a whole, up from 7.2 per cent in FY15, it said.
Taking into account the initial conditions, including the prospects for the monsoon and international crude prices, the RBI had in April projected a baseline path for inflation at 6 per cent by January next during which time there would a dip due to base effects till August and start rising thereafter to below 6 per cent by January 2017.
So far, inflation outcomes have closely tracked these projections. The risks to this trajectory are balanced as the weather-related uncertainties are offset by falling crude prices, the central bank said.
"Inflation developments will warrant close and continuous monitoring as part of the overall disinflation strategy that requires inflation to be brought down to 5 per cent by January 2017."
The RBI report said that for the economy, the outlook for growth is improving gradually. Business confidence remains robust, and as the initiatives announced in the Budget to boost infra investments get rolled out, they should crowd in private investment and revive consumer sentiment, especially as inflation ebbs.
The RBI said the government's resolve on fiscal consolidation should propel efforts to reach the target for the gross fiscal deficit for 2015-16 at 3.9 per cent.
On the revenue side, the report noted a massive uptick (38 per cent till July) in indirect tax collections and maintained that achieving the Budget target is contingent upon a recovery in manufacturing and services sectors.
"Plans for disinvestment need to be front-loaded to take advantage of supportive market conditions, and also to forestall cutbacks in capital expenditure to meet deficit targets," the RBI report said.
It said states need to take advantage of the greater fiscal autonomy stemming from higher devolutions and priorities capital and developmental expenditure so that the quality of sub-national fiscal correction is maintained.
According to the report, remittances have weathered the slowdown in global growth and should continue to lend support to the balance of payments.
Along with a surplus expected on trade in services as in the past, from software exports and travel earnings, the current account deficit for the year as a whole should be contained below 1.5 per cent of GDP.
RBI said the outlook for capital flows is highly uncertain, with the widely anticipated normalisation in the US monetary policy later this year expected to lead to capital outflows from emerging markets and also to harden financing conditions as bond yields rise.
"In this context, the level of reserves at over USD 350 billion and equivalent of about nine months of imports should provide a buffer and smooth out normal import and debt servicing requirements over the year."
The proposal to introduce a comprehensive bankruptcy code of global standards by FY16 and replacement of the exiting multiple prior permission procedure for investments by a pre-existing regulatory mechanism is expected to improve the business environment in the country.
Difficulty in ease of doing business has now become a widely cited constraint on revitalisation of manufacturing, the report noted.
Other areas that require significant changes include legal and regulatory environment, labour market reforms, tax regimes and administrative environment.
The report cited gaps in distribution networks and deteriorating financials of power discoms which need to be addressed expeditiously for demand to keep pace with the ongoing easing of supply constraints.