India faces several growth challenges like policy bottlenecks, under recoveries for OMCs: RBI

KOLKATA: Policy bottlenecks in clearing core sector projects, large under recoveries for oil marketing companies along with a possibility of overshooting the food subsidy bill are posing as veritable threats to economic recovery as the country is facing a low trend growth and high inflation persistently.

World Bank has recently cut its growth forecast for India to 4.7% from 6.1% while the country’s recorded a measly 4.4% GDP growth in the first quarter, the lowest in the four years. The economy grew by 5% last year. When trend growth remains low, the possibility of growth slipping further rises.

The Reserve Bank of India’s second quarter macroeconomic and monetary development review has pointed out that continuous policy logjams, particularly those associated with delayed clearances on the part of the government and inadequate appraisal mechanisms on the part of financiers, brought the infrastructure sector to a standstill. RBI said project delays have been slowing India’s growth in a big way.

As of June 2013, about 50% of central sector projects (of Rs 1.5 billion and above) were delayed, up from 44% in June 2008, for which the cost overruns rose from 12 to 20% during the last five-year period. Delayed projects were high in sectors, such as roads, followed by power, petroleum and railway.

On the fuel front, there have been concerted efforts to reduce the extent of suppressed inflation in the fuel segment. With the rise in fuel prices, there has been a significant slowdown in consumption in the recent period. However, RBI suggested further upward adjustment in fuel prices, given the still large under-recoveries, to dampen demand and restrain the twin deficits- fiscal and external. But rise in fuel prices push inflation higher and may force RBI to continue with its strategy keep policy rates high to rein in inflation and overlook growth.

India Ratings & Research predicted in September that the Indian government might overshoot its fiscal deficit target of 4.8% unless the price of diesel, petrol and LPG is raised.

The spectre of rising deficit also comes from the country’s burgeoning food subsidy bill. RBI observed that the government may overshoot Rs 900 billion food subsidy bill, especially after the introduction of the food-for-all programme, putting strains on the fiscal deficit targets. This will only means that the country may have to cut planned and development expenditures to control the burgeoning deficits.

“National Food Security (NFS) Act, 2013 may not lead to a breach in the budgetary provision of Rs 100 billion, the overall food subsidy provision of Rs 900 billion for the current year may not be adequate to meet the requirements of the existing targeted public distribution system,” RBI said.

In subsequent years, implementation of the NFS Act could lead to increase the food subsidies depending on how it is rolled out and how other food-related schemes are merged with it.