Greater political stability, commitment to fiscal consolidation, strengthening of the monetary policy framework and supportive implementation of policy measures have raised prospects of a turnaround in the economy, the Reserve Bank India (RBI) said in its latest report.
The central bank, however, expressed concern about rising bad loans, underlining the need to focus more closely on restructuring of standard loans.
“The economy is poised to make a shift to a higher growth trajectory. Gross domestic product (GDP) growth is expected to be around 5.5% in 2014-15 from the sub-5% growth in the preceding two years,” the central bank said in its annual report released on Thursday.
However, downside risks to growth and upside risks to inflation are likely to arise from the sub-normal monsoon and the geopolitical situation in West Asia.
To secure a sustainable growth of at least 7% over the medium term, economic policies that improve activity levels and productivity will be needed to work in tandem with a supportive macroeconomic regime with a reasonably positive real interest rate, low inflation, moderate current account deficit (the gap between inflows and inflows of a foreign currency) and low fiscal deficit.
“Microeconomic policies covering reforms in the areas of industry, services, international trade, labour markets, public sector management, financial markets and competition are needed to work towards improving activity levels and productivity, thus shaping improved supply responses that can help enhance growth potential,” the report said.
This approach can deliver a sustainable growth of at least 7% in a non-inflationary manner once global growth normalises, it said.
The investment climate in the economy is improving with the formation of a stable government at the Centre, a comparatively lower inflation and improvement in global growth.
Indicators such as automobile sales, railway freight traffic, cargo handled at ports and foreign tourist arrivals are pointing towards some recovery.
The report also said that the NDA government’s maiden budget presented by finance minister Arun Jaitely on July 10 is “supportive of both investment and savings.”
On non-performing assets (NPAs) -- those that do not yield returns -- RBI said restructured standard advances for all scheduled commercial banks rose from 2.5% of gross advances in June 2011 to 5.9% in March 2014.
The RBI has made debt restructuring norms more stringent and loans recast after April 1, 2015 will need to be classified as NPAs.
Going forward, reforms of financial benchmarks are planned. In order to ensure robustness and credibility of the financial system and minimise risks therein, a continuous monitoring and review framework needs to be in place, the report said.
RBI also reiterated its call for greater coordination among leading central banks while formulating policies and also urged emerging market economies to strengthen their domestic policy response to weather any eventuality arising from the US stimulus taper.