Consumer demand holds the key for pushing economic growth: Rajan

20 May 2015 Evaluate

Amid rising demand for reducing policy rates again, the Reserve Bank of India (RBI) Governor Raghuram Rajan has said that lower interest rates and tax incentives can boost investments, but it is consumer demand that holds the key for pushing economic growth. Rajan raising concern over central banks globally being pushed into 'competitive monetary easing' said that the "current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector. He further said that it is not an industrial country problem, nor an emerging market problem, it is a problem of collective action".

Governor Rajan pointing that policy rates cannot be reduced significantly below zero, though a number of European countries are testing these limits, said equilibrium long term interest rates may stay higher than levels necessary to incentivise investments. Rajan, making a familiar argument for better global coordination on monetary policy, said central bankers in developed economies should take more seriously their international responsibilities.

Talking about the possible solution, he said that another way to stimulate demand is for governments that still have the ability to borrow to increase spending. Since this will increase already-high levels of government debt, proponents suggest investing in infrastructure, which may have high returns today when construction costs and interest rates are low. Though, he added that high-return infrastructure investment is harder to identify and implement in developed countries where most obvious investments have already been made political influence is as likely to create bridges to nowhere or unviable high speed train networks as needed infrastructure.

The continuously lowering inflation has raised expectation and voices of another rate cut from the RBI. WPI inflation dipped to record (-)2.65% in April, while the Consumer Price Index based inflation fell to a 4-month low of 4.87 per cent in April. Further, the retail inflation based on consumer price index (CPI) for rural labourers eased to 5.49% in March from 6.19% in the previous month. The rate of price-rise based on CPI for agricultural labourers too softened to 5.24% in March from 6.08% in February.

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