Finetune domestic policies, says Gokarn

Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Tuesday called for fine tuning domestic economic policies that strike “new balance” between risks and opportunities, as Emerging Market Economies (EME) such as India will have to live with “uncertainty” amidst the global economy for some time.

“We have to activate domestic growth drivers to neutralise unfavourable global circumstances, in the backdrop of the euro zone crisis creating the global uncertainty,” Gokarn said, delivering the ‘Frank Moraes Memorial Lecture’ in honour of the doyen of Indian Journalism, organised jointly by the United Writers Association and the Frank Moraes Foundation.

Unpacking a slew of “best domestic policy responses” for India, in view of the large domestic market that BRICS (Brazil, Russia, India, China and South Africa) nations could take advantage of, Gokarn said that one of outcomes emerging from the ‘high growth period’ of 2003-08, when India’s annual GDP growth rate averaged a splendid 8.90 per cent, was that it threw up a ‘strong association between sound macroeconomic conditions and sustained rate of growth’.

Urging that one should not lose sight of this lesson, the RBI Deputy Governor expressed concern about the drop in India’s ‘Investment:GDP ratio’ after 2008. Short-term investments created a demand for goods and services, while long-term investments created capacities for growth.

Along with this, the post-2008 period, the high consolidated fiscal deficit of both the Centre and the states, the widening current account deficit, the stubbornly persistent food inflation of the past one year or so, were matters of concern, Gokarn said. In fact, food inflation running for months together at the 10 per cent level was a “throwback” to a similar episode in the 1970s’, he argued.

Gokarn said that though increasing food inflation - particularly protein-induced inflation - led to a surge in demand, “productivity itself has been flat” and logistics efficiency (infrastructure) has not improved. These two factors “aggravated inflation”, Gokarn contended.

A ray of hope for India, unlike in China, was that it could gain from the ‘demographic dividend’, provided the risks did not outweigh new opportunities, Gokarn said.