RBI governor sees signs of recovery

Pins hope on good crop prospects, rural demands.

Reserve Bank of India (RBI) Governor D Subbarao on Thursday said India’s economic recovery will be sharper and swifter than many others, once the world economy starts to recover from the global financial crisis of 2008. Some sectors of the economy have shown incipient signs of recovery, he said.

“In my view, India’s recovery will be faster as we are backed by strong fundamentals and untapped growth potential. Our overarching policy objective is to restore the economy to a high growth path, consistent with price stability and financial stability,” he said.

Addressing a press conference here after holding the central board meeting of RBI, Subbarao clarified that the Indian economy was not constrained by demand, but by supply. Household income in India was substantially higher than in China, as a percentage of the gross domestic product (GDP). “In my view, demand is there, but we need to invest more in infrastructure, manufacturing and services sectors to achieve rapid recovery,” he said.

Further, Subbarao said the pace of decline in certain areas has started to moderate, with some sectors showing tentative signs of recovery. “There are incipient signs of revival of business confidence. But, these signs may have to be more widespread across indicators and more durable to draw any clear inference on the timing and pace of recovery.”

According to him, certain sectors like FMCG, capital goods, cement and steel are doing reasonably well. The two-wheelers and commercial vehicles sector have shown signs of recovery. The sowing of rabi crop has improved by two million hectares in the present season as against a fall of 2.4 million hectares in the kharif season. Port traffic, freight revenues and road transport are showing improvement. And, the provisional results of 954 companies shows the growth in profit after tax in Q4 of 2008-09 is minus 2.1 per cent, as compared to minus 53.4 per cent in the third quarter, he added.

However, he said, there are still some negative indicators. Most notably, the Index of Industrial Production (IIP) is still negative. Rural consumption demand depends on the monsoon and crop prospects and in the next few months, we are hoping that private sector demand and investment will pick up, he stated.

“The balance of assessment at this stage continues to support our earlier assessment of real GDP growth of about 6 per cent for 2009-10. Once the crisis is behind us, managing inflationary expectations and unwinding the present expansionary policies will be our task and challenge.”

“Like all emerging economies, India too has been impacted by the global financial crisis, and by much more than what was expected earlier. Short and medium term outlooks are decidedly mixed. GDP growth has moderated, reflecting decelerating production, negative export growth, dented corporate margins, slowing credit demand and diminished business confidence,” the governor said.

However, he said, there are some strong positives that point to recovery. Inflation has declined sharply, the banking system remains sound, well-capitalised and prudently regulated. “The comfortable foreign exchange reserves should help us manage any short-term constraints in the balance of payments. Since there is no discernible “wealth loss effect”, consumption, specially rural consumption, is holding up. Because of India’s mandated priority sector lending, institutional credit for agriculture has remained unaffected,” he said.