Raghuram Rajan says India’s economic recovery ‘uneven’

Reserve Bank of India (RBI) governor Raghuram Rajan on Monday said India’s economic recovery was “uneven” though the country is doing better than a few months ago. Pointing out to the recent dip in oil prices, Rajan called for elimination of diesel subsidies. “Lower oil prices means lower current account deficit and lower inflation. We need to take this moment to eliminate diesel subsidies,” he said. Last week, Brent crude oil price fell to a 14-month low of $99.59 per barrel—the first time since June 2013 that it went below $100 per barrel. Lower crude have almost eliminated the difference between the international price and the subsidized domestic price of diesel leading to calls for the government to link the local sales of the fuel to the market price. Rajan alluded to economic data released on Friday that showed recovery was yet to fully take shape. India’s industrial production rose just 0.5% in July, lower than expectations of a 2% growth and down from a 3.9% expansion in June. Rajan said that though the data showed that capital goods production has eased and consumer durables had not picked up, the strengthening in the monsoon and increasing auto sales were positive signs of a recovery. Rajan, however, warned that though “macro indicators are improving, it’s still way before we are out of the woods.” RBI-watched consumer price index (CPI) inflation eased slightly to 7.8% in August from 7.96% recorded in July, data released on Friday showed. Rajan said the downward turned in inflation was “consistent with RBI forecasts”. RBI targets to bring down inflation to 6% by July 2015. However, Rajan said it was too early for the central bank to reduce interest rates. Replying to a question from a industrialist who asked why the central bank had kept rates high despite inflation being driven primarily by food prices, Rajan said, “there was no point in reducing interest rates to see it pick up again.” “Not only food inflation, prices of education, services, medicals are also growing. Non-food inflation is also high. I have no desire to keep interest rates high even for a second longer (than necessary). We have to win this fight against inflation,” Rajan said while suggesting to the industrialist that he consider cutting prices “to fight inflation.” Rajan was speaking to bankers and industrialists in a conference organized by lobby groups Federation of Indian Chambers of Commerce and Industry and Indian Banks’ Association. Rajan said a stable government had made India stand out among its emerging market peers. However, geopolitical risks “like the one in Ukraine and Middle East” remain. He also pointed out that “we are reaching close to the initiation of interest rate increases in US,” which could be be a “blessing or turmoil as exchange rate moves.” Rajan said that banks will have to continue to finance infrastructure projects because, “fortunately or unfortunately”, there are no other entities to do long-term financing, but he also called for bankers to become better in evaluation of projects. “We need better evaluation. Evaluation is central to banking and it cannot be outsourced. We have to engage in informed banking. We need early recognition of projects and quick and effective project restructuring for distressed projects,” Rajan said. Rajan also touched upon the recent incidents of corruption in public sector banks. Last month, the Central Bureau of Investigation (CBI) arrested Syndicate Bank Ltd chairman and managing director S.K. Jain, accusing him of accepting bribes to give loans to companies. Rajan said the banking system needs to use it strengths by weeding out “bad apples” from the system. RBI has suggested the government to spilt the posts of chairman and chief executive officer (CEOs) in public sector banks to allow “one more layer of oversight” in the management of these banks. Suggestions also include lengthening the tenures of CEOs, making the appointment process for the top posts of these banks more transparent and empowering bank boards “to focus on doing important stuff rather than just box-ticking.” “Public sector banks have to have the freedom to make commercial decisions. They are not extensions of government any longer. (Government) mandates should be backed by financial payments. We are taking up this issue with the government, let’s see how it works,” Rajan said. Last month, the central government launched the Pradhan Mantri Jan Dhan Yojana which plans to open 75 million bank accounts for people who have no bank accounts currently. Rajan said the Jan Dhan scheme is a a good one provided banks do not just focus on adding numbers that could lead to duplicate accounts or accounts opened for people who are not the targeted beneficiaries. Rajan said the political class in the country has to understand that waiving loan repayments does not help the poor. “Waiving off loans is an unhealthy activity. Every time a waiver is done, it diverts access to credit and shrinks credit availability. In 1989-90 and again in 2009, agriculture credit dropped just after a big loan waiver,” he said.