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“The government is well aware that we need to address three or four issues. First, we have to get growth started out again, we need to stabilise growth which has declined in recent years. There is need to restart stalled project,” Rajan said at Citi-MIT Sloan Symposium today.
He said the country’s fiscal deficit was too high to finance through market borrowings and there was a need to stick to the path of fiscal consolidation by reducing government's consumption expenditure.
“You can't keep running a large fiscal deficit and (then) borrow to finance it. The finance minister has made a firm commitment that this year's fiscal deficit will be 5.3% and next year it will be 4.8%. We have to stick it and we have the intent to do it,” Rajan explained.
Last year’s fiscal deficit had overshot the Budget Estimate of 4.6% to stand at 5.9% of the GDP. Rating agencies have threatened to downgrade India if the fiscal discipline is not brought in.
Rajan cited current account deficit (CAD) as the third major area attracting government’s attention and a cause of concern. He said India was running a large CAD which had to be managed.
CAD was at a record high of 5.4% of the GDP in the second quarter (July-September) of 2012-13. The government is worried that it might remain high in the next financial year too and is looking at foreign capital flows to fill the gap. It has increased import duty on gold to prevent capital outflows.
Analysts said the points raised by Rajan would be important inputs for Budget making.
Rajan also said it was not impossible to grow without some corruption, but high level of corruption made growth difficult. He said there are very few countries with zero corruption, but clarified he was not justifying any level of corruption and that it should be reduced as far as possible.
“Current debate about corruption in the country can be seen as cup half full rather than cup half empty. Our institutions are taking notice, they are paying attention. CAG is asking the right questions.
CVC is asking questions, Supreme Court is asking questions. That is forcing a change in institutions… What has happened is that the opportunity to become corrupt has increased as growth picked up,” he added.
Rajan also stressed the need for making business environment friendlier for investors, but cautioned that it should not become so comfortable that the companies stop growing.
“We have to create a macro-economic environment where people can grow. The larger the firm more productive it is. We are not allowing them to become bigger. We need to encourage more small enterprises. Growth is a means to an end and not an end in itself.
