India’s economic growth below potential, says Rajan

As per the RBI governor, investment, inflation, and lending rates are the key problem areas

GN Bureau | August 30, 2016


#seventh pay commission   #lending rates   #inflation   #Raghuram Rajan   #RBI  
Raghuram Rajan


Outgoing reserve bank of India (RBI) governor Raghuram Rajan feels that India’s economic growth is below its potential. In a foreword to RBI’s annual report 2015-16, Rajan highlighted what all ails the country’s economy. Rajan’s term ends on September 4.

Rajan stated that while policy actions taken by the government and RBI in restoring macroeconomic stability to the economy have had positive effects, there are a number of areas to be considered “work in progress”. He pointed out three areas of importance, from RBI’s perspective.

“First, economic growth, while showing signs of picking up, is still below levels that the country is capable of. The key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors. Second, inflation projections are still at the upper limits of RBI’s inflation objective. With the Reserve 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. Third, the willingness of banks to cut lending rates is muted; not only does weak corporate investment reduce the volume of new profitable loans, their stressed assets have tightened capital positions, which may prevent them from lending freely. Certainly, the reluctance to lend to industry and small businesses is more visible among the more stressed public sector banks compared to the private sector banks,” Rajan wrote.

He, however, added that there have been some developments that bode well. They included “expectations of a good monsoon (corroborated thus far) coupled with more money in the hands of government servants (as a result of the implementation of the 7th Pay Commission recommendations)” and also “reforms like the recently passed Goods and Services Tax legislation in Parliament”.

 

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