Rate cuts can't lift GDP growth; govt needs to act too: RBI

Moneycontrol Bureau

The Reserve Bank of India’s macro economic report released Thursday said that for economic growth to revive, the government needed to do much more in terms of removing infrastructure bottlenecks and improving governance.

It made it clear there was limited room for cutting interest rates in FY14 because of multiple global and domestic risks, notably inflation.

The RBI report has forecast a slow paced economic recovery this fiscal, with the RBI's survey of professional forecasters lowering its growth forecast for FY14 to 6.0 percent from 6.5 percent.

The report’s outlook on interest rates assumes significance as expectations of a cut in interest rate have increased because of the recent softening in inflation, as well as decline in crude and gold prices. The market has taken a 25 basis point-cut in interest rates for granted, and some experts are even betting that the RBI may surprise with a 50 basis point-cut on Friday.

The Survey makes it clear that low interest rates alone would not be enough to kick start economic growth, and said that a “cautious” monetary policy was needed because of both local and global risk factors.

"Recovery at the current juncture will critically depend on supply-side action to remove a host of micro-constraints and structural bottlenecks that impede production and investment, especially in growth-driving sectors such as road and power. The government has initiated action in this direction, but progress has been slow, making it imperative for decisive action to be taken quickly on the outstanding issues," the Survey said.

If the government fails to do this, it would further aggravate the problem of bad loans for banks, choke off flow of debt as well as equity finance to stressed firms and stall recovery, the Survey warned.

And while a dose of government investment stimulus was welcome, it would have to be financed within the budgetary constraints, the Survey added.

The Survey said that the slowdown has been amplified because of loss of business confidence.

"Interest rates can play only a limited role in revival," the Survey said, highlighting the regulatory and infrastructure problems in sectors like road, coal, power, mining and telecom.

"While appropriate regulatory and legal frameworks are necessary to ensure sustainable growth, transparency and the speedy redressal of issues would go a long way towards improving the business climate," the RBI report said.