Slow governance responsible for decline in growth: Rajan

Business

oi-Staff

By Super

Published: Saturday, September 6, 2014, 12:00 [IST]

Attributing decline in economic growth to "slow governance" and faulty allocation of natural resources, RBI Governor Raghuram Rajan has said GDP will improve to 7 percent in next three years on back of political stability.

"The sharp slowdown in GDP from 8-9 percent growth to 4-5 percent in the last two years was caused by issues such as environment and land acquisition problems, delays in withdrawal of fiscal and monetary stimulus, irregularities around allocation of natural resources and slow governance," a Citi report quoted Rajan as saying.

Rajan had addressed a group of investors in Boston yesterday.

"On the back of political stability, improved business and investment climate, GDP growth is poised to improve towards 7 percent over the next three years," he said.

India's economic growth has slipped to sub-5 percent in 2013-14 and 2012-13 fiscals. In the current financial year, RBI estimates the growth to be 5.5 percent.

In the first quarter of 2014-15 fiscal, the GDP improved to 5.7 percent, from 4.6 percent in the corresponding period a year ago.

Referring to the recent judgement of the Supreme Court on coal block allocation, Rajan said it "may create uncertainty in the short term, but long term, it is a positive development".

As regards the inflation, he said it is still high because of supply side rigidities. "Food inflation is a source of discomfort and given the sub-par monsoon this year, there is a need to keep an eye on food inflation," he said.

Food inflation in July stood at 8.43 percent. The retail inflation was 7.96 percent and WPI inflation was 5.19 percent.

The RBI targets to contain retail inflation at 8 percent this year and 6 percent by next year through a sound monetary policy framework.

Rajan said, barring unforeseen external macro shocks, containment of the Current Account Deficit (CAD) and fiscal consolidation is likely to continue.

"Fiscal slippage has been arrested, but the quality of the deficit could be improved - particularly on the subsidy rationalisation and capital expenditure front," he said.

The government aims to bring down fiscal deficit to 4.1 percent this fiscal. The CAD, which is the difference between inflow and outflow of foreign exchange, narrowed sharply to USD 7.8 billion (1.7 percent of GDP) in the first quarter of the 2014-15 fiscal. It was USD 21.8 billion (4.8 percent of GDP) in the year-ago period.

Rajan said RBI considers it prudent to be prepared for the eventual exit from low rates.

Rajan's vision for India's banking system involves a more competitive banking structure.

Stressing that India needs more banks, he said that the RBI was a little more conservative in the current round of licensing, given that it was timed around the elections.

The RBI, he said, will come out with a framework on the NBFC sector, which needs to complement the banking sector.

PSU banks, he said, constitute 70 per cent of the total banking sector assets.

"The government needs to improve the governance of PSU banks before it can reduce its stake in them," Rajan said.

To facilitate greater participation of foreign banks, the RBI might relook at priority sector lending norms, he said, adding one possible solution could involve domestic banks doing more agriculture lending and foreign banks doing more SME lending.

PTI