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RBI sees hurdles to sustainable faster growth

India's central bank on Tuesday raised doubts about the pace of economic growth in the medium term, saying two years of slowdown had revealed problems that needed to be overcome.

Though it did not revise its GDP growth forecast of 6.0-6.5 per cent for 2001-02 (April-March), up from 5.2 per cent last year, the bank's latest annual report said that this was linked to expectations of bountiful rains and a sharp industrial revival.

It expressed optimism that the monsoon rains were on course, a key factor in India where about two-thirds of the billion-plus population depends on agriculture and related activities.

"However, the industrial outlook continues to be uncertain and a cause for considerable concern," it said.

It expressed uncertainty over moving the economy to a sustainable higher growth rate -- critical to reducing poverty levels in the world's second most populous nation.

A slowdown in demand, particularly investment demand, insufficient infrastructure and an inefficient public sector were hurdles to faster growth, it said.

This had led to a toning down of optimism generated by a phase of spectacular growth in the mid-1990s when the impact of the first phase of economic reforms started in 1991 was felt.

Fiscal deficit

The report reiterated past concerns over the country's fiscal deficit and levels of domestic public debt, factors mentioned by global rating agencies Standard & Poor's and Moody's Investors Service earlier this month when they downgraded India's ratings.

It estimated the combined fiscal deficits of federal and state governments at 9.1 per cent of GDP at the end of March 2001 but said this number could more than double if guarantees are taken into account.

According to the annual report, guarantees, mainly for loans and credits, issued by central and state governments totalled 10.7 per cent of GDP at the end of March 2000.

The report expressed concern that not only was public debt high, but a study revealed a disturbing growth in revenue expenditure such as pensions and interest payments.

Interest rates

The RBI said that it would maintain its easing monetary stance, provided inflationary pressures did not build up and there were no adverse external sector developments.

The central bank has cut its benchmark bank rate, used by commercial banks to set their own rates, twice this year by a total of 100 basis points to 7 per cent.

It has also cut banks' cash reserve ratio by a similar margin to 7.5 per cent.

The report noted that there were structural impediments to lower interest rates -- high levels of sticky loans with public sector banks which account for around 75 per cent of the banking industry's total business, heavy government borrowings and high rates offered on state-administered savings schemes.

A sustained reduction in long term rates would be possible if government borrowings came down, it said.

The report was, in general, confident about the external sector but stressed that a sharp increase in foreign capital inflows was required if the current account deficit was to be kept within targets set by the government.

The RBI has forecast the 2001-02 current account deficit at 2 per cent of GDP.

The five-year plan which runs from 2002-2007 has projected an average annual 2.8 per cent current account deficit during this period.

The RBI said this would imply an increase in foreign capital inflows to around $40 billion a year by the end of the plan period from $10 billion in the first year.

Downgrading India's rating earlier this month, Moody's said though the current account deficit measured against GDP appeared small, this was due to the relatively closed economy and was no guarantee that external finances were healthy.

The report said policies needed to be simplified to attract capital flows. Further reforms in the financial sector were also needed if convertibility on the capital account is to be achieved.

The tightly policed Indian rupee is convertible only on the current account.

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