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India needs more private investment, says Subbarao

India needs more private investment, says Subbarao
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First Published: Sun, Apr 26 2009. 09 22 PM IST

Economic outlook: Subbarao says long-term growth drivers are intact. Abhijit Bhatlekar / Mint
Economic outlook: Subbarao says long-term growth drivers are intact. Abhijit Bhatlekar / Mint
Updated: Sun, Apr 26 2009. 09 22 PM IST
Washington: India needs more private investment and a recovery in the world economy to return to the high growth rates recorded prior to the global financial crisis, Reserve Bank of India (RBI) governor D. Subbarao said.
The central bank, which cut interest rates last week, is urging domestic lenders to lower borrowing costs further to encourage business spending, Subbarao told reporters on Saturday in Washington, where he was attending meetings of the International Monetary Fund and World Bank.
Economic outlook: Subbarao says long-term growth drivers are intact. Abhijit Bhatlekar / Mint
India’s economy likely expanded at least 6.5% last year, from annual growth of 8.9% on average over the prior five years. Subbarao, who earlier this week said Asia’s third largest economy is faring better than most in the global recession, on Saturday cited some signs of improvement in demand in industries including cement and steel.
“India will be one of the countries that will recover fast,” Subbarao said. “To go back to 9%, we need the world to recover fully. Private investment demand has to pick up” and banks must reduce the cost of credit.
The central bank on 21 April trimmed interest rates for the sixth time in as many months to a record low, as it projected economic growth of about 6% this year. It cut the reverse repurchase rate, or the rate at which it sucks out liquidity, to 3.25% from 3.5%, and the repurchase rate, or the rate at it infuses liquidity, to 4.75% from 5%.
Still, lenders haven’t fully passed on the lower rates to their customers. ICICI Bank Ltd, India’s biggest non-state-owned financial institution, cut lending rates by 50 basis points last week after trimming them by the same amount in the past six months. State-run banks have reduced borrowing costs by about 200 basis points after government prodding. One basis point is one-hundredth of a percentage point.
While the short- and medium-term outlook for the economy is “mixed”, Subbarao said long-term growth “drivers are still intact”. He expects a “swift and sharp” recovery once global growth rebounds, adding that it may take “a couple of years” for India to resume expanding at 9%. The central bank will use various policy instruments to spur the economy, he said, declining to comment on whether he will cut interest rates further.
Before this week’s rate decision, the central bank estimated its policy steps, along with increased government spending and tax cuts, were worth as much as $85 billion or almost 7% of gross domestic product.
The government and central bank will assess the effects of the stimulus on the economy before deciding on more steps, Subbarao said in an interview on Saturday.
“It’s already working through, but we have yet to see the peak,” he said. The effect may be more visible in the second and third quarters of the current fiscal year that started on 1 April.
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First Published: Sun, Apr 26 2009. 09 22 PM IST