#dnaEdit: RBI optimistic

Reserve Bank of India’s annual report, an assessment and prospects of the Indian economy, cheers up somewhat even in the midst of a rainfall deficit in the current season. The deficit has been estimated to be of the order of 18 per cent of the long period average (LPA). This will leave some lingering impact on the farm sector for sure. The large buffer stocks should help cushion any shortfall in the production of food grains. More importantly, however, the vegetable production is feared to get hit and that will have its implications for the price line. The latest inflation figures still show rising prices of fruits and vegetables. The good signs though are that the disinflationary glide-path is on course and the RBI sticks to its target of 8 per cent Consumer Price Index (CPI) by January 2015 and 6 per cent by 2016. 

The inflation figures are critically relevant as that queers the pitch for the so-called growth-inflation trade off. That is, whether you have the leeway to fine tune the interest rates and encourage growth or whether the central bank would have to follow a strict anti-inflationary regimen. Going by the trends, it should be possible to slowly encourage growth with prices stabilising. 

Going by its overall assessment, RBI is hopeful that growth momentum should gather pace. It had already stated its views during its credit policy review last month. It reiterates that India should grow faster — by at least 5.5 per cent if not a tad higher. That is reassuring and also shows the resilience of the Indian economy. Even a decade back, rainfall deficit of the proportions we have seen in the current year, the economy would have been hit badly. Today, we are expecting a slight pick-up in growth rate. 

But, of course, this is conditional. If overall growth has to pick up when farm sector is feared to show a hit, obviously the other segments — that is, industry and services — have to fare better than they have been showing. Mining and manufacturing, two heavyweights of industry, have not been doing well for a long time now. Both have shown contraction in output than robust growth. It is only recently, just about the last quarter that they are showing signs of coming back to life. Their performance is really related to the political situation as well. Without faster clearance of mining projects, the sector’s output cannot show any jump. Renewed growth of both these sectors call for fresh investment. A return of the investment cycle is, therefore, critically needed. The new government has also taken a step to egg this on by making it possible for banks to lend for infrastructure projects.

Here is a catch, though. According to the RBI figures, bank’s lending to five infrastructure sectors are found to be most stressed. Although overall stressed assets of scheduled commercial banks have marginally declined, bank loans to private sector for infrastructure, iron and steel, textiles and mining (including coal) constitute 24 per cent of total advances, but they represent over half of banks’ stressed assets. 

So the question that is staring at us, taking the RBI figures only, is how do we finance our growth? How can banks fund these critical sectors if their funds already locked up in these projects are mostly non-performing assets? How do we hit a high investment ratio, which is essential for high growth. This calls for some deep introspection. 

Maybe, government must also look at its “contractual relationship” with private infrastructure and other major projects for keeping them healthy. Too often, mid-stream changes in project life had rendered them non-viable.