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Sep 9 2008 5:18PM
RBI have focus on to moderate demand
Reserve Bank Of India has released Governor's Press Statement, contained remark on Indianeconomy by Hon. governor of RBI Mr. Subbarao. Indian economy has 7.9% growth in firstquarter of 2008-09 compared with 9.2% in the same quarter last year. The apex bank havepositive outlook in Indian economy. RBI is expecting high growth and low and stableinflation however focus will remain on to moderate demand.
Economy
The economy clocked growth of 8.9 % on an average annual basis over the last five years.Despite the slow-down in advanced economies, the global financial turmoil and volatilecommodity prices, growth in the first quarter of 2008-09, on an annualised basis, was 7.9% among the highest in the world.
India's remarkable economic expansion from an average of 5% in the 90s to close to 9% inthe recent period has been led by rise in private consumption, rise in private investmentand surge in exports. I believe these engines of growth are still on track. The recentmoderation is only a cyclical downturn. The structural India growth story is still in-tactand credible.
Monetary Policy
The current high level of domestic inflation reflects a combination of supply-sidepressures as well as demand-side factors. It is not surprising that after five years of 9% growth, supply constraints will begin to emerge. However, the present inflation islargely a global phenomenon and is being driven by key international commodity prices,especially of crude oil, metals and food. These external pressures are being exacerbatedby strong domestic demand pressures. Though demand is not the main problem, in the absenceof further flexibility on the supply side, demand management has to be part of thesolution. Dampening demand and anchoring inflation expectations has been the logic behindReserve Bank's monetary stance.
For sustained economic growth, it is essential that inflation and inflation expectationsbe contained. Our high growth over the past five years was accompanied by low and stableinflation, and financial stability. Our policy stance must ensure similar outcomes in theyears ahead. Some have argued that the monetary measures initiated by the Reserve Bankwill affect growth. As I had said earlier, the intent behind monetary tightening was, infact, to moderate demand, and hence, some slow-down should not surprise us.
What, in fact, is the counterfactual? Not tightening the monetary policy and exposingourselves to the possibility of a runaway generalised inflation? That too would haveeroded confidence in the economy. Indeed, the impact on growth and the impact on the poormay have been more severe under such a situation.
I have been asked whether monetary policy will be tightened further. There are, as theysay, several known unknowns. First, we will have to watch the impact of the measuresalready taken. Second, we will be watching the drivers of demand in particularwhich sectors are triggering the growth in demand. Third, in a globalised world, we willalso have to be watching developments around the world and make an assessment of theirpotential impact on our economic management. All I can say is that we will be monitoringthe situation closely and continuously, be mindful of the implications of our monetarystance on the growth prospects, and take action as appropriate.
Financial Sector
Now let me turn to the financial sector. First of all it is heartening to note that theReport on Currency and Finance put out by the RBI last week finds improvement in theefficiency of the Indian banking sector, especially of the public sector banks.
Quite evidently, the upward shift in our growth trajectory has been possible because ofthe higher pace of investment. Investment as a share of GDP, increased from 25 % in2002-03 to 38 % in 2007-08. Of this 13 percentage points increase, as much as 10percentage points was financed domestically through higher household, public sector andcorporate savings
It is in the intermediation of these savings into investments that the Indian financialsector played a key role in our growth story. While what the financial sector has achievedis impressive, the task ahead is formidable. The financial sector has to become morecompetitive, efficient and forward looking. This underscores the importance of financialsector reforms. The Reserve Bank is deeply conscious of this.
On the way forward on financial sector reforms, we are not short of analysis and advice.There are a number of reports, notably the Patil Committee on corporate bond markets, thePercy Mistry Committee on making Mumbai an international financial centre and theforthcoming Raghuram Rajan Committee on financial sector reforms. The recent Currency andFinance Report of the RBI, as also the previous Report, are important and valuableadditions to this list. The Government and the RBI will also be bringing out, shortly, acomprehensive report of the Committee on Financial Sector Assessment.
What we need to do is to use the available analyses and advice to draw a roadmap thatresponds to our immediate and medium term needs. Obviously this is a shared responsibilityof the government, the RBI and indeed all other regulators. Consultation with allstakeholders will be an important process on the way forward. We will engage in this taskin earnestness.
I want to conclude on the subject of financial sector reforms with three short comments.First, the liberalisation and development of the financial sector over the last few yearshas been a key factor in financing our 9 % growth. To sustain and accelerate this growth,financial sector reform, aimed at improved efficiency and financial stability, will remainimportant. In moving forward, we will draw from the lessons of global experience of therecent period, and be cognizant of the evolving global situation. Second, financial sectorreforms are not an end in themselves. They have meaning and relevance only if they areanchored in real sector objectives. Third, financial sector reforms should promoteinclusive growth through efficient and easily accessible financial services.
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