India's top priority is to revive stalled projects

AS India moves into election mode, high inflation, a weak currency and a perception of policy paralysis have affected investment sentiment. As a result, the 2012-2013 growth, revised to 4.5 per cent from 5 per cent last week, was at a decade's low. In the current fiscal year, which ends on March 31, growth is expected to be around 4.8 per cent. The government is using various fiscal policy instruments to tame inflation and kick-start stalled investment projects. Last week, the Reserve Bank of India (RBI) announced a 25-basis-point hike in the benchmark repo rate, at which it lends to commercial banks, to 8 per cent. The cash reserve ratio - the amount banks must keep in hand to withstand financial shocks - was left unchanged at 4 per cent.

Most analysts expected the central bank to hold the rate steady, considering that the key Wholesale Price Index came down in December to 6.16 per cent year on year from 7.52 per cent in November. RBI governor Raghuram Rajan justified the hike by saying that the rollback of the US Federal Reserve's quantitative easing posed significant risks and hence there's a need to address this in "order to stabilise and anchor inflation expectations". The RBI's decision was criticised by both the industry and analysts, who were of the opinion that the hike would delay economic recovery by making loans more costly. The Confederation of Indian Industry (CII) advocated a shift to an accommodative monetary policy stance, sooner rather than later.

However, the plain-speaking Mr Rajan told industry that he did not have any "magic wand" to lower borrowing costs. He noted that, rather than concentrate on the lending rate, what was needed was the revival of stalled projects, calling that the "first priority". The critical need was to get investment back as once that came, the rest would follow, he added. The governor has a valid point. While inflation has been a major problem, there has also been a steep decline in investment. For example, from 2005 to 2008, the economy grew at an average rate of 8-9 per cent. The gross fixed capital formation rate, a measure of the accumulation of fixed assets by business, government and households, was 32.9 per cent of gross domestic product (GDP) in 2007-2008. In 2011-2012, this came down to 30.6 per cent, with the corporate sector showing the steepest decline.