RBI’s Rajan is sounding off alarm bells for the economy asking the govt to announce a path-changing Budget 2016

RBI Governor Raghuram Rajan spelled out his reasons for not slashing the repo rate and CRR. However, he kept the ball rolling in Finance Minister Arun Jaitley’s court, saying the Union budget will have to do the real reformatory easing.

While announcing the bi-monthly policy, Rajan sounded off alarm bells, hinting that the growth trajectory will not see much momentum before FY17. As we have just begun with the year, this means that momentum in growth will be seen only by the end of two years.

Rajan said the current pace of growth did not meet expectations over the medium term, adding the RBI was being ‘accommodative’.

Here are few factors that RBI hinted at:

1. Rajan said the Union Budget, which will be announced on February 29, should announce structural reforms and keep a tight control on spending. He added that the government will have to announce measures to ensure that the inflation remains on the set path of 5% by the end of 2016-17.

2. Don’t expect any further cuts in tax slabs and more subsidies from the Budget 2016. One of the primary ways in which the government can control its expenditures is by being wise about the pay panel recommendations. “How the government implements a planned 24 percent pay hike in salaries and pensions for some 10 million current and former government employees will also be key in determining the path of inflation,” said Rajan.

3. The RBI is also hoping for good monsoons this year as this is also one of the key factors for strengthening growth. After two consecutive years of bad monsoons, Rajan said if the country receives good monsoon, it will increase trade and household incomes. However, an El Nino effect may be seen.

4. While there are rounds of liquidity crunch in the banking system, Rajan said the central bank will use all methods possible to pump in money in the bank. Rajan ditched the perception of a liquidity crunch. The RBI governor has been pushing banks to clear their bad debts in order to have more money to loan, which will lead to propel investments and lead to clearing of stalled infrastructure projects.

5. There has to be a revival in private investment for a higher growth trajectory and it is needed for the government to pay heed to the fiscal deficit.

(Image: Indiatimes)