Slow governance responsible for decline in growth: Rajan

Attributing decline in economic growth to “slow governance” and faulty allocation of natural resources, Reserve Bank of India (RBI) Governor Raghuram Rajan has said gross domestic product (GDP) will improve to 7 per cent in the next three years on the back of political stability.

“The sharp slowdown in GDP from 8-9 per cent growth to 4-5 per cent 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 Dr. Rajan as saying.

Dr. Rajan had addressed a group of investors in Boston on Thursday.

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

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

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

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

As regards inflation, he said it was 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 per cent. The retail inflation was 7.96 per cent and Wholesale Price Index-based (WPI) inflation was 5.19 per cent.

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

Dr. 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 per cent this fiscal.

The CAD, which is the difference between inflow and outflow of foreign exchange, narrowed sharply to $7.8 billion (1.7 per cent of GDP) in the first quarter of the 2014-15 fiscal. It was $21.8 billion (4.8 per cent of GDP) in the year-ago period.

He said the RBI considered it prudent to be prepared for the eventual exit from low rates.

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

Stressing that India needed 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, would come out with a framework on the NBFC (non-banking finance company) sector, which needed to complement the banking sector.

PSU banks, he said, constituted 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,” Dr. 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.