India's economy will pick up by year-end -central bank chief

Reuters

By Richard Valdmanis

CAMBRIDGE, Mass., Oct 15 (Reuters) - India's economy willpick up by year-end thanks to the start-up of billions ofdollars worth of stalled resource projects and a good monsoonseason that will bolster agricultural production, the head ofIndia's central bank said on Tuesday.

The Reserve Bank of India is due to review monetary policyon Oct. 29, with a rising pace of inflation bolstering odds foranother central bank interest rate hike even as the economystumbles through its worst crisis since 1991.

"The correct question is: are you going to raise rates ornot? The answer is: I'm not going to tell you," Raghuram Rajantold an academic audience at Harvard Business School inCambridge, Massachusetts.

He later said that he believed India's economic growth wouldstart to pick up in the fourth quarter after a commission gavethe green light to scores of resource projects that had been puton hold during a sweeping government review of transparency andenvironmental policy.

He said about half of the $115 billion worth of stalledprojects had been cleared.

"The effects of that clearance will show up toward the endof the year. So growth will start picking up because these largeprojects will start coming back onstream," he said.

He did not give a forecast for fourth-quarter growth.

"The second piece of good news is the monsoon has been verygood ... with a bountiful harvest, and with the associatedactivities like animal husbandry, poultry, also picking up, youcan see a lot more value in the rural areas, which will helpsentiment and growth," he said.

India's economic growth has slowed sharply in recent yearsfrom around 8 percent per year between 2002 and 2012 to about 5percent in 2012-13, while its current account deficit hasballooned and inflation has risen.

Worries over the rising pace of inflation had already ledRajan to surprise markets last month with an interest rate hikeof 25 basis points.

Rajan said that investors were quick to blame structuraldysfunction for India's economic troubles, but that the issueswere more likely to do with the unwinding of stimulus in thewake of the global financial crisis, policy reviews stallingprojects, and a spike-up in Indian demand for gold.

"There's a lot that is going on to fix these medium-termproblems," he said.

"If you are an outsider looking at India, learn to filterout both the irrational exuberance and the excessive pessimism.We're subject to both. You will become manic-depressive if youfollow our moods."

He added that the question of using interest rates toaddress inflation was more complicated in India than in theUnited States.

"In the U.S. you know there is a large interestrate-sensitive sector that is going to be affected when youraise interest rates ... But what if you have a large part ofthe country that is not connected directly to the financialsystem?" he said, referring to India's massive rural population.

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