Cut sops, boost capex: RBI

The Reserve Bank of India (RBI), has exhorted the Centre to cut revenue spending by paring subsidies while enhancing capital expenditure to attract private investments.

According to RBI, it is imperative to embark upon such an initiative as the current twin deficits, which are causes of concern, leaves limited fiscal and monetary space for providing direct growth stimulus without stoking inflation.

Releasing its annual report for 2011-12, the RBI, likewise notes that over the medium term, addressing issues impeding infrastructural investments has become important for stepping up the country’s growth potential, while observing that growth during 2012-13 is expected to stay at around the same level as the previous year.

In this regard, the RBI said that though monetary tightening and growth deceleration has helped contain inflation, it (inflation) is expected to hover at around 7 per cent with upside risks emanating from a deficient monsoon.

Growth in 2012-13, RBI said, is expected to stay below trend at around the previous year’s level of 6.5 per cent since the outlook remains weak as factors that slowed down growth in the previous year persist with no sign of resolution.

Further, RBI pointed out that newer uncertainties for growth have emerged from unsatisfactory monsoons. In the absence of global conditions improving, the burden of adjustment needs to be borne by domestic policies such as structural impediments. The negative impact on business confidence needs to be addressed speedily, besides
fast-tracking infrastructure projects to boost investment, RBI said.

With limited fiscal and monetary space available to provide direct stimulus, the RBI has called upon the Centre to take to an expenditure-switching policy reducing revenue spending by cutting subsidies and using the resources released to step up public capital expeditures.

The key to effecting economic revival will lie in embarking on the three imperatives of preserving India’s growth story -- through revival of infrastructure investments, strengthening the banking system through Basel III reforms implementation and financial inclusion led by RBI policies with a human face.

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