Now, RBI blames govt of policy stasis

NEW DELHI: It is not just the Opposition that feels the government is in the grip of a policy paralysis. The Reserve Bank of India has said "concerns over policy stasis" must be addressed as "newer risks" to growth emerge from slowing global trade, domestic supply blocks and a slack monsoon.

The central bank said reviving investor confidence will need steps to improve the decline in investment that is proving to be a "major drag" on the economy. Growth risks in 2012-13 have amplified in the context of domestic and global conditions. The investment climate is flat. RBI told Parliament's standing committee on finance that the first quarter of 2012-13 remained weak while the services sector took a hit too. "Services growth is also showing signs of slowing in line with slowing industrial growth and weak global economy," the central bank said.

"Revival of investor confidence needs to be supported by addressing concerns over policy stasis, while putting in place complimentary actions that address macro-economic weaknesses," the bank said.

RBI governor D Subbarao told the panel on Monday that the investment climate was flat and sectors like power, coal, civil aviation were particularly worrisome. These are precisely areas under adverse spotlight, with last week's mega power outage exposing the magnitude of the crisis.

The governor's prescriptions to nurse the economy back to health are a bitter pill for the government. He argued for a cut in fuel subsidy, saying a short-term jump in inflation needs to be squared off against the urgent need to curb widening deficits. Doing away with fuel subsidy, he admitted, could mean a 2.6% spike in inflation.

RBI warned that rates cuts will not happen unless the government sets its house in order. "In current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," the bank said in a note. The central bank further explained that "as multiple constraints to growth are addressed, RBI will suitably adjust its monetary policy stance".

The fiscal deficit target for 2012-13 is at risk of being breached due to a mounting subsidy bill and a shortfall of receipts. "...fiscal space needs to be created by curtailing subsidies and significantly boosting government capital expenditures to provide an investment stimulus to the economy, which would help crowd in private investment," the RBI said.

Pointing to the possibility of India's vulnerabilities to external shocks in the light of slower FDI inflows and a likely rise in external debt, the central bank said the trade balance needs to be redressed along with an improvement in inbound investment.

Despite a moderation in international crude prices, the current account deficit poses a significant risk as slowing growth and trade are likely to keep expansion in exports of goods and services low.

Source : timesofindia.indiatimes.com