Source: The Hitavada      Date: 31 Aug 2018 11:46:27

THE country’s economy appears to be back on track, given the optimism expressed by the Reserve Bank of India (RBI) in its annual report released on Wednesday. While it points to several positives appearing on the horizon, just as pick-up in manufacturing and mining activity, strong growth indicators in industry, services sector activity, robust sales by corporates, improvement in profitability, joined by good monsoon and strong agricultural production, it has also a word of caution on the widening current account deficit (CAD). But at the same time it feels that this will be taken care of by the rising inflow of foreign direct investment. Till the last review of its monetary policy, the apex bank had preferred to maintain status quo on interest rates as it was concerned about the seasonal impact of inflation, especially retail inflation, which mostly impacted the common man. According to its own perception, now that things are changing for the better, will it be inclined to make borrowing for investment less costly, is the question persistently asked.

Right from the days of former Governor of the RBI Mr. Raghuram Rajan, the RBI has been maintaining a cautious approach on lowering interest rates as inflation continued to be a major inhibiting factor, though there were persistent demands from business and industry as also the Finance Minister. In fact there were occasions when the Finance Minister and the RBI Governor had publicly differed on the perception of lowering borrowing costs. Once again the same question is likely to be raised as the economy gains fresh momentum of growth and as the demand for finance to spur investment grows.

Unfortunately, however, while the economy is poised to take a leap forward, the banking sector is reeling under the impact of bad loans, euphemistically labeled as non-performing assets (NPAs), so much so that the Government has to keep on pumping more and more money to keep the country’s banking system afloat. In this situation to expect the banks, more particularly those in the public sector, might not be in a position to meet rising demand for finance for investment. And what the country as of now needs is investment in various sectors so as to take advantage of the positives that have begun to emerge of late so necessary for creation of employment which will subsequently lead to growth in demand for manufactured goods and services. That will be reflected in the GDP growth.

It is, therefore, necessary that the banking sector is brought on track as early as possible. The country has now the chance to resume its growth story. Lack of finance should not become an inhibiting factor. The monster of bad loans, the so called NPAs, has to be reined in upon which lies the very future of the Indian economy. Those who have wilfully defrauded the Indian banking system must be brought to justice as early as possible and made a lesson of them. This should also serve as a warning to others who may be similarly disposed to defraud banks.
With good monsoon this year the agriculture sector holds a good promise for demand to pick up. This also means the rural sector too would take to the growth path along with the rest of the country. That will have a huge impact on the over all growth of the economy, provided of course the weather holds good for the next few weeks of the kharif season.

But the worrisome part in the country’s growth story would, of course, be the widening current account deficit. Two factors are playing out in this regard: Rising crude oil prices in international markets, which makes a huge dent in India’s foreign exchange earnings, and strengthening dollar in respect of Indian rupee, besides the mismatch of exports in relation to imports. It remains to be seen how this situation is handled.