Need private consumption to sustain GDP growth: RBI

Subir Gokarn, Deputy Governor, Reserve Bank of India (RBI), says one needs to recognise the continuing contribution of government spending, which has grown by over 26%. "While the recovery seems to be gaining strength, we should not ignore the fact that it is still currently being driven substantially by public spending. We are seeing some effects of Pay Commission and so on translating into consumer durables."

He feels growth in the October-December quarter may decline due to the recent drought. "One needs to watch out for negative farm growth in Q3." He stated that private consumption needs to pick up for sustained growth.

Commenting on the exit policy, Gokarn says, RBI will have to start roll back of stimulus at some point. “We do not need to be in a permanent stimulus mode at least a long-term stimulus mode.”

Below is a verbatim transcript of the interview. Also watch the video.

Q: What is the RBI's take on the latest GDP figure?

 A: The important thing to recognize is the continuing contribution of government spending which has grown by over 26%, that is, government final consumption expenditure. So while there is a recovery and it seems to be gaining strength, we should not ignore the fact that it is still currently being driven substantially by public spending. We are seeing some sound round effects of Pay Commission and so on translating into consumer durables. We have seen that over the last few months. So that is also in a sense part of the fiscal stimulus. But clearly this is better news than we could have expected and we will have to review forecast for the year as a whole as we go along. 

Q: So 7% plus is now a possibility?

A: I think it is premature to extrapolate from these numbers because the third quarter will really show us what the impact on agriculture is of the monsoon. That may take the numbers down a bit. As of now we have not seen negative numbers in agriculture for second quarter – it was 0.9%. Third quarter we shouldn’t be surprised to see it go down.

Q: What about the impact of Dubai crisis on growth per se?

A: It is a little too early to tell. We are seeing various attempts by government agencies in the Emirate to deal with the Dubai crisis. We will have to wait and see what the ultimate solution is but for the moment, I do not think this is exploding into any kind of systematic problem. We are keeping a watch on it.

Q: What about the review of the stimulus? 

A: I really do not want to comment on what other government spokesman have said. The issue remain that the economy has started to show signs of recovery. It is not a boom yet but it is sort of indicating that we do not need to be in a permanent stimulus mode, at least a long term stimulus mode. Somewhere along the line we have to start talking about.

Q: Is it a concern for central bank that this recovery is largely driven by the government spending and private spending is not checking out well?

A: It is not question of concern for central bank. It should be question of concern for the entire policy making establishment that recovery will only be sustained if the private sector through consumption, investment and exports stars to stabilise. We are seeing some signs of that clearly. It is not as good, these signs are not there. But for the moment, over the last couple of quarters, very clearly the role of government the contribution of government has been very significant.

We will need to see the transition happening before we gain comfort about the durability of the recovery. It is there – the signs are there but at the moment it is still, as we saw from even the second quarter numbers, the government is still playing a very important role.

Q: With this kind of growth do you see an early reversal of the monetary policy?

A: It is too early to comment on that. The monetary policy will be announced on January 27. We will not have any more GDP numbers but we will have industrial production, agriculture and export numbers coming in between now and then.

All of that will be taken into account when we make a decision on the monetary policy stance. So it is at this point all you can infer is the signal that was sent in the October policy.