MUMBAI, June 2: The Reserve Bank of India (RBI) Governor C Rangarajan today said that in the light of the current deceleration in some of the key industrial sectors, slower than required expansion of infrastructure industries may stem as a major constraint in sustaining a growth rate in excess of seven per cent.

``Improving infrastructure position would not only require a large order of investment both in the public and private sectors, over a medium to long horizon but also effective and efficient utilisation of the existing capacity,'' Rangarajan said while delivering the 17th B F Madon Memorial Lecture at the Indian Merchants' Chamber here.

The issue of maintainability of a growth rate of seven per cent or more in future has to be addressed both from the resource side and from the angle of the physical structural constraints in the economy, he said.On the resource side, improvement in domestic saving rate would constitute the most critical factor for accelerating the growth momentum in the economy and if the saving rate achieved in 1995-96 (25.6 per cent) is maintained in 1997-98, it is possible to realise an investment rate of around 27 per cent, Rangarajan said.

RBI governor said it is also important to note that, with the increased competitive pressure, the economy is slowly but gradually moving up on the productivity scale, which has been reflected in the recent decline in the incremental capital-output ratio (ICOR).Rangarajan said during the period 1993-94 to 1995-96, the mean ICOR declined to 3.7 from over four in the 1980s. These trends would indicate that achieving a growth rate of about seven per cent in the medium term may not pose a difficult challenge, he said.

But the key question is what policy conditions will be required to maintain and perhaps enhance the saving rate to around 27 per cent?, he said.The governor said public sector saving must show further improvement from the level of 1.9 per cent of GDP achieved in 1995-96.He said the industrial growth, after showing a speedy recovery in 1994-95, touched a peak of 11.6 per cent in 1995-96.Industrial growth seems to have decelerated during 1996-97 as the overall industrial production index grew by 7.5 per cent upto January 1997.Some correction therefore, has taken place in the industrial growth from the peak attained in 1995-96, he said.

He said despite the strong improvement in the lendable resources following a large order of release of liquidity through reduction in cash reserve ratio (CRR), the credit demand remained sluggish with the non-food bank credit showing a growth of 10.1 per cent in 1996-97 as against 22.5 per cent in 1995-96.This has happened despite the decline in the prime lending rate of most of the banks, he said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.