Attributing the current economic woes to stimulus provided by the government to tide over the global financial crisis of 2008, RBI Governor Raghuram Rajan has said it eventually led to an overheated economy, high inflation and uncomfortable fiscal and current account deficits.
Addressing investors at an Citibank event in New York, Raghuram Rajan said the Indian economy has slowed to below 5 per cent from an average of 8 per cent between 2002-2012, mainly on account of domestic factors.
The slowdown is "largely a result of domestic factors (institutional weakness, withdrawal of stimulus) and one-third due to global factors,", Citi said in a release today quoting Rajan.
"While the stimulus did help growth initially, it eventually led to an over-heated economy, high inflation/wage growth and consequently deficits widening to uncomfortable highs".
The then Finance Minister Pranab Mukherjee gave three stimulus packages to the industry to combat the impact of global financial meltdown of 2008.
The current account deficit (CAD), which is the difference between inflow and outflow of foreign exchange, rose to a record high of 4.8 per cent of GDP in 2012-13, from 2.8 per cent in 2010-11.
Following the measure taken by the government and the RBI to increase inflow and restrict gold imports, the CAD moderated to 3.1 per cent of the GDP in first half of current fiscal. It was at 4.5 per cent in H1 of 2012-13.
"Efforts to rein in the CAD have worked with the deficit likely to come in at sub 3 per cent of GDP from 5 per cent last year," he said.
On a more long-term basis, Rajan hoped that inflation indexed bonds would help reduce gold demand.
Referring to fiscal deficit, he said the budget target of 4.8 per cent of GDP is likely to be met, "but could result in a contraction in spending, depending on the extent of revenue shortfall".
The fiscal deficit stood at 4.9 per cent in 2012-13.
Raghuram Rajan said there was a need to improve the financial system by clarifying monetary policy framework, strengthening the banking structure through new entry or bank expansion and broadening financial markets, among others.