The warning from RBI comes even as some political observers are expecting a hung Parliament after the Lok Sabha elections next year
The Reserve Bank of India (RBI) has warned that any political instability after the general elections in 2014 will drag the beleaguered economy further down, unless there is a stable new government at the centre.
RBI governor Raghuram Rajan, in his foreword to the eighth edition of the RBI’s Financial Stability Report 2013, said, “A potential additional source of uncertainty is the coming general elections. A stable new government would be positive for the economy”.
Warning that any political instability will lead to further erosion of investor confidence in the economy, the RBI governor said, “With confidence in the financial system still fragile, six years into the crisis, policy certainty is something that investors look for in the current environment.”
The warning from RBI comes as some political observers are expecting a hung Parliament after the Lok Sabha elections.
Though the government is claiming that GDP will grow at over 5%, many analysts peg it at a little over 4% this fiscal.
With stressed assets continuing to rise and expected to get worse, the Reserve Bank has cautioned that risks to the banking system have increased over the last six months, but added that there are no systemic risks at the moment.
“The banking stability indicator shows that risks to the banking sector have increased since June 2013,” the central bank said in the report.
The report said, with the present conditions continuing, the gross non-performing assets (NPAs) in the system will rise to 4.6% by September 2014 from 4.2% in September 2013 or about Rs 2.29 lakh crore from Rs1.67 lakh crore a year earlier.
The amount of recast loans touched an all—time high of Rs4 lakh crore or 10.2% of the overall advances as of September 2013, the report added.
However, the RBI expects some positives in the second half of the next fiscal and is estimating gross NPAs to improve to 4.4% by March 2015.
In case the economic conditions deteriorate, the same number will be 7% by March 2015, the RBI warned.
According to the RBI governor high inflation is limiting the central bank’s ability to boost growth with an accommodative monetary policy.
“The outlook for the economy has improved, with export growth regaining momentum, but growth is still weak. The challenges of containing inflationary pressures limit what the monetary policy can do,” Rajan said in his forward.
It can be noted that RBI has increased its key rates twice in the last three monetary policy reviews citing concerns emanating from high inflation, while Rajan stayed away from increasing it for the third time earlier this month and chose to wait for clarity on data.
WPI inflation stood at 7.52% in November, a 14-month high, while the consumer price index-based inflation rose to a nine-month high of 11.24%.
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His concern on political uncertainty notwithstanding, the Indian economy has to prepare for a sturdy growth path based on robust infrastructure development - more particularly the energy sector. The oil prices are going to take the balance of payments for a toss unless we properly plan for taking care of this eventuality.
Banks will have to adjust to a new regulatory environment and incorporate the paradigm shift into their business strategy and introspect their role as instruments of development. The social dynamics are fast changing in the economy. The climate set for reduced subsidy regime, rising rural consumerism amidst not-so-encouraging corporate sector behavior and growing distribution inefficiencies would be greater concerns for 2014 than the political uncertainty.