India’s economy is likely to grow at 5.5% this year though private investments haven’t shown real signs of picking up yet, a finance ministry report said on Friday, even as it hinted that the Reserve Bank of India was unlikely to cut interest rates before March.
The report said more public spending was required, particularly in infrastructure, to turnaround Asia’s third-largest economy that has clocked sub-5% growth in the last two years.
The Mid-Year Economic Analysis, tabled in Parliament on Friday, also said credibility has returned to India’s monetary policy since late 2013, in an obvious testimonial to the policies of current RBI governor Raghuram Rajan.
“For a long time, the Indian economy had been drifting without a credible monetary anchor. Since late 2013, however, this has been laudably reversed,” said the analysis, prepared by chief economic adviser Arvind Subramanian.
“For nearly six years (third quarter of 2007 to third quarter of 2013), India lost monetary policy credibility, reflected in the fact that real (inflation adjusted) policy interest rates were consistently negative at a time when inflation was persistently in the double-digit territory,” it said. Real rates are calculated as the difference between interest rates and inflation, and have to be positive for healthy returns.
During the period mentioned, YV Reddy was at the helm of the RBI from September 2003 to September 2008 and was succeeded by D Subbarao, who remained the central bank chief till September 2013. Raghuram Rajan took over as RBI’s 23rd governor on September 4, 2013.
On interest rates, the analysis said that “in the aftermath of the recent credit policy statement of the RBI, it is worth looking at the stance of monetary policy under the assumption that interest rates will be held at current levels until the last quarter (ending-March) of 2014-15”.
Earlier this month, Rajan kept key lending rates unchanged, ignoring hints from the government and mounting pressure from business leaders to cut borrowing costs on the back of low inflation to push investment.
“To revive growth going forward, public investment may have to play a greater role to complement private investment,” said Subramanian, a former US-based economist who joined the government as the CEA in October.
The report also called for a relook at the public-private-partnership model for infrastructure development “as it has been less than successful”. It also called for easing of land purchase rules to revive investment.