India growth story still credible, says RBI Governor

Moneycontrol Bureau

Ahead of its mid-quarter monetary policy review on March-19, The Reserve Bank of India (RBI) Governor D Subbarao underscored India's growth potential even if the current GDP growth hit 15-quarter low of 4.5%. However, he cautioned on the high rate of inflation, which still remains above the central bank's comfort level of 4-6%.

"The India growth story is still credible and the long term growth drivers are still intact," Subbarao said in his speech delivered at London School of Economics on India's macroeconomic challenges.

"If we do the right things, we can get back on a high growth trajectory. We can  accelerate growth and improve welfare only if we effectively implement wide ranging economic and governance reforms. Slipping up on this will amount to a costly and potentially irreversible squandering away of opportunities."

He further stressed that government needs to lead the process of economic revival while admitting that RBI too has a key role to play.

Inflation

India's headline wholesale price index inflation had been above 7 percent from 2009 until January, when it fell to 6.62 percent from 7.18 percent in. The WPI inflation data for February is due on Thursday and is expected to have eased further to 6.54 percent, according to a Reuters poll.

Subbarao said that both demand and supply side factors has pushed India’s inflation to uncomfortable levels. Food inflation had been the key driver from the supply side. Food inflation is still the worrying trend as it remained high in January. Inflation on food articles rose to 11.88% in January 2013 from 11.16% in December 2012.

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Despite the high inflation many in industry believe that the central bank would cut repo rate by 25 bps in the upcoming monetary policy owing to moderation of growth.

"Inflation persists at an elevated level and the current account deficit is likely to be the highest ever, suggesting that the economy is growing beyond its capacity and that the potential growth may be lower than even 7 per cent," the governor observed.

Apart from inflation control, controlling widening fiscal deficit has also been the key priority of the centre. Food and oil subsidy has been the key contributors in this. In January the government deregulated diesel prices and allowed retailers to increases prices gradually over period of one year. Subbarao said that desubsidization would be inflationary in short term but price  pressures will even out over the medium term.

"Reduction in subsidies will remove price distortions, improve efficiency and provide a much better investment environment," he said.