Slow governance liable for decline in growth: RBI Guv Rajan

New Delhi: Attributing decline in economic growth to “slow governance” and faulty allocation of natural resources, RBI Governor Raghuram Rajan has said GDP will improve to 7% in next three years on back of political stability.

“The sharp slowdown in GDP from 8-9% growth to 4-5% 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 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% over the next three years,” he said.

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

In the first quarter of 2014-15 fiscal, the GDP improved to 5.7%, from 4.6% 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.

The RBI aims to contain retail inflation at 8% this year and 6% by next year through a sound monetary policy framework. 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% this fiscal. The CAD, which is the difference between inflow and outflow of foreign exchange, narrowed sharply to $7.8 billion (1.7% of GDP) in the first quarter of the 2014-15 fiscal. It was $21.8 billion (4.8% of GDP) in the year-ago period.

Rajan said RBI considers it prudent to be prepared for the eventual exit from low rates. Rajan’s vision for India’s banking system involves a more competitive banking structure.

Stressing that India needs more banks, he said the RBI was a little more conservative in the current round of licensing, given that it was timed around the elections.

PSU banks, he said, constitute 70% of the total banking sector assets. “The government needs to improve the governance of PSU banks before it can reduce its stake in them,” 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.