India’s monetary authority Reserve Bank of India (RBI) said that the main challenge to revert to a high growth path was to revive private consumption and investment expenditure. Governor of the RBI Duvvuri Subbarao said at an industry event that government will have to ensure a pick up in private expenditure as well.
The government is running a fiscal deficit of 6.8% in the current fiscal, highest in the post liberalization era, which according to the finance minister was a deliberate strategy to push growth through increased government expenditure. While the move is sure to help in expansion, the government cannot sustain the deficit at such high levels in the medium run and therefore the road to climb back to high growth levels will only be through stimulating private investment and consumption levels going forward.
The governor added that the full benefit of the rate cuts announced by the banks had not reached the private sector and while the cost of financing had come down, the decline was lower as compared to the aggressive policy being followed by the RBI. India’s apex bank had cut its short term lending rate by 425 basis points in six tranches since October last year in a bid to keep Indian economy growing amidst global downturn.
Economists expect that the RBI will shift its stance from completely growth oriented to a mixed one with giving some weight to anchor inflationary expectations as well in the near future. The Bank is widely expected to start rolling back the easy money policy towards end of the current fiscal as it sees inflationary pressures building up. RBI had increased its inflation target for the fiscal end to 5% in the first quarterly review of monetary policy statement from 4% given in April.