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The growth rate may come down: Subir Gokarn

February 17, 2011
RBI's Deputy Governor Subir Gokarn
RBI's Deputy Governor Subir Gokarn
The Reserve Bank of India 's outlook for the growth rate in the coming year is dimmer, though close to trend. After the central bank announced its third quarter review of monetary policy on January 25, Deputy Governor Subir Gokarn spoke with BT about the changed scenario for the economy and the RBI's outlook. Edited excerpts:

On the significant changes in the macroeconomic environment since November 2010 highlighted by RBI
We have highlighted a number of risks, both for the macro economy and monetary policy. These risks have to do with global developments, commodity price pressures, domestic inflationary pressures and the current account deficit in the balance of payments. Last year, the risk was much more on global instability and now it has shifted to other factors. As the advanced economies are recovering in the backdrop of abundant global liquidity, there is a strong pressure on commodity prices. Going forward, capital flows may be more diversified globally, so countries like India may not attract the same quantum of capital, and of course, there are both global and domestic inflationary pressures.

On the RBI's outlook that GDP growth rate could decline
That is because the 8.9 per cent growth rate that we have seen so far this year - though perhaps the annual number will be slightly lower - has come on the back of an agriculture rebound from a very bad show the previous year. What we are saying is that we do not expect this momentum to accelerate, but the growth rate may remain close to the trend. And that is shaping our inflationary outlook as well and consequently our policy.

On whether the slowdown will be caused by RBI's anti-inflation measures
The impact on growth will be due to a combination of factors. It is a consequence of the fact that we have raised interest rates quite substantially over the last one year and the fact that there is a base effect. The arithmetic of the growth rate is less important than the momentum of industry and services. And we are saying that the momentum is not going to continue to accelerate. This is a guidance that has shaped our thinking on what is the appropriate policy action.

On by how much the rate will slow
We will come out with an assessment for a number or a range for that on May 3, 2011. On RBI's notes of caution on the government's role One has to be realistic about what the monetary policy can achieve with the instruments it has. Particularly on food prices - not all of them because the onion and vegetables shocks will dissipate fairly quickly - but the more persistent ones such as milk and pulses and so on. There needs to be a strong supply response and that is not something that the monetary policy can achieve. It is not that individual piecemeal solutions are not effective but they have to be brought together and an action plan has to emerge for the quickest possible impact.

On India facing a growth versus inflation trade-off if the government fails to act owing to elections later this year or other political and non-political reasons
It is really a question as to what combination of growth and inflation the society is comfortable with. If there is a very sharp increase in inflation in order to sustain a higher rate of growth, that may not be an acceptable trade-off. The faster the supplyside bottlenecks are addressed lesser the chance that you are going to get into that situation.

On how close we are to that alarmist situation
That is a very important question and we should be contemplating it.

On why foreign direct investment is not picking up
The steep fall in FDI is a concern. It has dropped sharply from 2009 and we are analysing the reasons for this... it is not fully understood yet.

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