The Hindu Business Line : RBI wants to counter slowdown by boosting aggregate demand

These measures, aimed at boosting aggregate demand, include restructuring the composition of Government expenditure, attracting more private investments in education and health, and a shift in fiscal expenditures in favour of public investment in infrastructure.

In its report on `Currency and Finance' released on Monday, the RBI has said a stimulus to aggregate demand can also be applied through expansionary monetary policy through its influence on real interest rates. Output effects are positive in the short run, losing force as the inflation effect dominates over time.

The current inflation rate in the country has fallen below the threshold estimated for India. The threshold itself has a shifting perspective, responsive to underlying inflation conditions.

The report said that the threshold inflation i.e., the growth maximising inflation, rate is estimated at five per cent.

``There are potential output losses involved in further disinflation. Sacrifice ratio estimates suggest that, in a low inflation environment, a one percentage point reduction in inflation leads to a decline in output by two percentage points below its potential,'' said the report.

According to the RBI, ``catalysing private investment could be the central focus of the second generation of reforms.'' The RBI has also emphasised the importance of an agenda of reforms that directly addresses the fundamental obstacles in progress.

Explaining some of the factors that have contributed to the deepening economic slowdown and delay in revival in India, the report has said that infrastructural constraints, variability and shortfalls in agricultural output, erosion in quality of public services and gaps in technology and human development are ``insidiously becoming binding constraints in growth.''

At the same time, the report has pointed out that the Indian economy is characterised by cycles and these cycles are of very short duration.

According to the report, ``a few positive signs are visible in the improved capital flows and the steady build-up in the foreign exchange reserves.''

The principal policy instruments, i.e., fiscal and monetary policies, have been shifted to counter-cyclical mode and the stance of policies is clearly in favour of further adjustments to create a congenial environment for the awaited return.

The report has added that there is a growing recognition that the existing level of structural reforms is ``succumbing to the inexorability of diminishing returns and bolder and more intensified reforms are required in the `difficult areas' such as agriculture, labour market, bankruptcy and exit procedures, social sector and legal reforms.''

It has also observed that so far, private consumption has been providing the predominant contribution to the aggregate demand relative to investment and discretionary fiscal stabilisers mainly in the form of Government consumption have been holding up aggregate demand over the period of the downturn.

The report said capital formation has been slowing down across all three sectors of the economy - manufacturing, agriculture and services. Greater investment needs to be directed towards the manufacturing sector so as to revitalise growth. The report said that capital formation in agriculture has been declining which is a matter of concern. The lack of capital has been the primary impediment to the adoption of new technology. Integration of Indian agriculture with international markets would be necessary in the context of commitment to WTO, complemented by well-developed domestic markets for agricultural commodities, the report added.

The services sector has imparted resilience to the economy, particularly in times of adverse agricultural shocks as also during cyclical downturns in the industry. According to the report, a notable feature of the structural transformation has been the growth of skill-intensive and high value-added sectors.

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