Low spend slowed growth: RBI

Hong Kong: RBI governor Raghuram Rajan said Asia’s third-largest economy is being hampered by a drop in public and private investments, but held out hope that strong foreign capital flows will help rectify this weakness.

Weak capital investment has been a hurdle in India’s quest to realise its growth potential and with factories running 30 per cent below capacity, private companies are in no rush to invest in new projects. “On the growth front, the central concern is with investments,” said Dr Rajan, who was speaking at a business event in Hong Kong on Friday. “Private investment has fallen back quite a bit and so has public investment.”

The RBI has cut its growth forecast for the current fiscal year to 7.4 per cent from 7.6 per cent previously, well below the government’s target of 8 to 8.5 per cent, but still faster than China.

Despite the slowdown in growth and investments, Dr Rajan said strong foreign direct investment (FDI) and some traction in infrastructure development may encourage private investments.

During the period from January to June, FDI flows into India rose to $19.4 billion, up 30 per cent from a year earlier, a sign of what the government called investors’ growing confidence in the country.

Earlier this month, India eased foreign direct investment norms in 15 major sectors, including mining, defence, civil aviation and broadcasting. “We are seeing a lot of traction in FDI, in both announcements and actual investments on the ground,” he said.

“Once we start seeing a little stronger demand, we will start seeing more projects being pulled out of the drawer,” he said. RBI cut the benchmark policy rate by a half percentage point to 6.75 per cent in September, after months of pleading by government leaders and industrial groups for more stimulus to stoke growth. He declined to comment on the appropriate level of the rupee, but said policy makers should guard against a debt build-up in the global economy.