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High inflation, deficits, subdued growth key challenges for Indian economy: RBI Governor

16 May 2014 Evaluate

The Reserve Bank of India’s (RBI) Governor Raghuram Rajan has pointed that a subdued growth, the fiscal and current account deficits and sticky inflation are the four biggest macro-economic challenges. Presently, Indian economy is struggling with slowdown and the factors like high interest rates, low investments and slow execution of infrastructure projects have been impacting economy’s growth. Indian economy’s growth slowed down to 4.6 percent during the first three quarter of FY14 and is likely to remain at sub-5% level in FY14.

On inflation front, the Governor has said that despite some improvement in price rise over the past few months, WPI inflation still remained above the Reserve Bank of India's comfort level of 5 percent. Rajan further stated that Interest rate is the best tool available with the central bank to control price rise, whereas the Government too has tools like increasing agricultural production and improving supply to check inflation. Raghuram Rajan added that the new government and the central bank need to work together to check high inflation, which has been eroding the business sentiments in the country. Rajan exuded confidence that retail inflation would come down to 6% by March 2016. The WPI inflation eased to 5.20% in April as against 5.70% in March, while, retail inflation rose to three-month high at 8.59% in April.

The country is also witnessing improvement on fiscal as well as current account deficit front. During the April-December FY’14, CAD stood at $31.1 billion (2.3% of GDP) versus $69.8 billion (5.2% of GDP) reported in the same period of previous fiscal year. In the FY14, the CAD is likely to improve to around 2% of GDP level mainly on the back of improved trade deficit figure. Further, the country’s fiscal deficit is expected to contain at 4.5% of GDP in FY14 as compared to the 4.89% of GDP in the previous fiscal year.

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