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Updated: August 24, 2012 15:03 IST

Lower interest rates alone not enough to jump-start investment cycle: RBI

Special Correspondent
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‘Structural impediments impacting business confidence need to be addressed

“Lower interest rates alone are unlikely to jump-start the investment cycle,” said the Reserve Bank of India (RBI) in its Annual Report 2011-12, which was released on Thursday.

“With limited fiscal and monetary space available to provide a direct stimulus to domestic growth, an expenditure switching policy is needed that reduces government’s revenue spending by cutting subsidies and using the resources so released to step up public capital expenditure,” the Reserve Bank of India said.

The RBI said that structural impediments impacting business confidence needed to be addressed immediately, in areas such as mining and infrastructure to stimulate growth.

Fast-tracking of infrastructure projects and pending regulatory clearances would help boost investments. The RBI also said that there was a need to boost the performance of core industries to revive industrial growth.

Newer uncertainties for growth in 2012-13 had emerged from the unsatisfactory progress of monsoon so far, which could result in a contraction in foodgrains’ output during 2012-13.

“Despite the recent revival, cumulative rainfall up to August 16, 2012, was 16 per cent deficient. The Reserve Bank’s production-weighted rainfall index showed an even higher deficit of 21 per cent. The spatial pattern of monsoon suggests that output losses could be substantial for coarse, cereals and pulses.”

Given the greater integration of the Indian economy, the RBI said that decelerating global growth and trade volumes would adversely impact India’s industry and services sector growth. In addition, “the lagged impact of weak industrial growth is likely to weigh on services sector growth.”

Further, it said that the emergence of twin deficits — fiscal and trade — during 2011-12 was a major cause of macro-economic weakness. Current assessment suggested that they would stay wide in 2012-13 in the absence of sufficient policy response and no improvement in business cycle conditions, the RBI said. ``With growth remaining slow, budgetary targets are at risk. Shortfall in indirect tax revenue, decline in corporate earnings, difficulties with disinvestment and expenditure overshooting due to under-provision of petroleum subsidies are likely to put fiscal position under pressure,’’ it said.

Current account deficit (CAD) had widened to unsustainable levels in 2011-12 as it reached historical high of 4.2 per cent of gross domestic product (GDP). This was mainly due to high imports of oil and gold. However, the RBI said, “Measures taken to curb gold imports may have positive influence on trade balance.”


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More In: Economy | Business

Although it may not "jump-start" the cycle, it will render some positive help. This is evident from the stand the CII has taken. RBI has to consider other options of fighting inflation other than raising interest rates. There could be more factors affecting the inflation like rise in fuel prices, using diesel generators for production, etc.

from:  E. M. Fisher Fernando
Posted on: Aug 24, 2012 at 20:52 IST
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