Why India is slowing down, Rajan explains

Attributing decline in economic growth to 'slow governance' and faulty allocation of natural resources, RBI Governor Raghuram Rajan has said gross domestic product will improve to 7 per cent in next three years on 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 Rajan as saying.

Rajan 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, 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 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 per cent.

The retail inflation was 7.96 per cent and 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.

Image: Arun Jaitley (L) listens to Reserve Bank of India Governor Raghuram Rajan during a financial stability development council meeting in Mumbai June 7, 2014. Photograph: Reuters