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‘Growth is still below potential after picking up’

Economic growth, while showing signs of picking up, is still below levels that the country is capable of, says Rajan

Policy Pulse
Publish Date: Aug 30 2016 5:20PM | Updated Date: Aug 30 2016 5:20PM

‘Growth is still below potential after picking up’

Raghuram Rajan, Governor of Reserve Bank of India (RBI) observed that economic growth while showing signs of picking up was still below the level the country was capable of.

 

On inflation, however, the outgoing central bank governor said projections were still at the upper limit of the RBI’s inflation objective, constraining space for a reduction in interest rates.

 

“Economic growth, while showing signs of picking up, is still below levels that the country is capable of,” Rajan wrote in the foreword of the central bank’s annual report for 2015-16.

 

“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.” The governor hoped that monsoon rains, which have been normal so far this year, coupled with implementation of the recommendations of the Seventh Pay Commission, would boost consumer demand.

 

“With final demand picking up, capacity utilisation is likely to increase, and so will investment. A virtuous cycle of growth is possible, reinforced by anticipation of the coming benefits from reforms like the recently passed Goods and Services Tax legislation in Parliament,” he wrote.

 

In the annual report, the central bank said the near term domestic outlook appears ‘somewhat’ brighter than the outcome for 2015-16. It said while a durable pick-up in investment activity remains elusive, consumption will continue to be the main support to aggregate demand.

 

Rajan, however, sounded cautious on inflation. Inflation projections were still at the upper limit of the RBI’s objective and room for a rate cut would emerge as inflation slowed.

 

“With the RBI 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,” he wrote. At the current juncture, the upside risks to the March 2017 inflation target of 5 per cent were prominent.

 

He reiterated that the short-term macroeconomic priorities of RBI continue to be to focus on bringing down inflation towards the government-set target of 4 per cent.

 

Rajan also observed that the willingness of banks to cut lending rates was muted and there was a reluctance to lend to industry and small businesses among the more stressed public sector banks compared with the private sector banks.

 

RBI reiterated that it would continue to monitor banks’ asset quality issues in 2016-17. Banks have suffered heavy losses in recent times after the banking regulator forced them to classify many accounts as non-performing.