Rating downgrade risks have abated, says Urjit Patel

Comfortably financing CAD through cap flows; forex reserve position strong

There are signs of revival in the economy and the India growth story is intact, according to the Reserve Bank of India (RBI).

“Domestic growth for FY14 is expected to come in at 6.1-6.7 per cent,” said Urjit Patel, deputy governor of RBI, addressing investors at Nomura’s two-day conference that concluded on May 29. Patel ascribed the current slowdown in domestic growth to weak export growth, widening trade deficit and a weak rupee.

India’s GDP in 2012-13 expanded at the slowest pace in a decade, by five per cent, according to data released by the government today.

“India is still expected to remain one of the fastest growing large economies in the world,” said Patel. He highlighted the fact that inflation was beginning to decline and core inflation has moderated significantly, although food inflation remained a worry.

According to him, the threat of a sovereign rating downgrade has abated. He added the country’s external account is expected to improve.

“On the external front, CAD (current account deficit) is being financed comfortably through capital flows, without the need to dip into foreign exchange reserves. The external debt/GDP ratio at 20 per cent is quite manageable,” Nomura quoted him as saying.

During October-December 2012, the CAD had hit a record high of 6.7 per cent of GDP, much higher than RBI’s comfort zone of 2.5 per cent.

Patel also praised the government’s recent policy initiatives such as opening of foreign direct investment in multibrand retailing, power exchanges, and aviation, aimed at increasing stable capital inflows.

“On the capital flows side, the government has opened the rupee bond market, revised bond limits for FIIs (foreign institutional investors) and reduced withholding taxes on a number of instruments,” he said.

Patel said the priority of the government is to speed implementation of stalled projects. The finance ministry had a series of meetings with bankers over the past two months to find ways to revive stalled projects. According to the ministry’s estimate, Rs 7 lakh crore of projects are stalled at various stages due to reasons such as environment clearances and land acquisition issues. Power sector projects are the worst affected.

Keeping inflation down and managing both the fiscal deficit and CAD should be the policy priorities of the government, he added.