NEW DELHI, Aug 21 (Reuters) - Indian government officials painted an upbeat picture for the economy on Thursday as it struggles to emerge from the longest spell of sub-par growth in decades and promised to tighten up risk management at the country’s dominant state banks.
Finance Secretary Arvind Mayaram said growth is on course to recover to about 5.8 percent in the year to March 2015, up from 4.7 percent last year - the second year of growth below 5 percent, too slow a rate to provide jobs for the large numbers entering India’s labour force.
Recent economic data does point to a nascent recovery: industrial production is having its best run since last September, infrastructure output growth is at a nine-month high and manufacturing activity is growing at its fastest for 17 months. Car sales, a proxy for consumer demand, are also up.
“If you look at the trend growth, then you see green shoots of recovery in the economy,” Mayaram told an industry chamber.
Persistent concerns about the health of the country’s banking system were also addressed on Thursday when Finance Minister Arun Jaitley told delegates at a banking event in New Delhi that the government was working to tighten up risk management in the sector, giving a vital boost to confidence.
The prolonged slowdown has hit the Indian banks’ balance sheets as bad loans rose to 4.1 percent of gross advances in March from 2.4 percent in March three years ago, the Reserve Bank of India (RBI) said in its annual report on Thursday.
Restructured loans rose to 5.9 percent of gross advances in March from 2.5 percent in June 2011, the central bank said.
“Some recent instances have been disturbing,” Jaitley said.
“I would only hope that they are a drop in the ocean and we have all learnt the lessons from such incidents, and there will be no repetition of them,” he said.
While a sluggish economy is the main reason for a rise in distressed assets, the RBI’s report also blames the banks for lending to certain “excessively leveraged” groups.
The launch of a corruption investigation at state-controlled Syndicate Bank has raised broader concerns about weak oversight, graft and politically directed lending at state banks.
Weak industrial activity and capital investments lie at the heart of India’s growth struggle, and Prime Minister Narendra Modi’s election triumph has stoked hopes that he will replicate his success as head of Gujarat state in boosting investment.
Added to those hopes, the global economy shows signs of strengthening and is expected to lift overseas demand for Indian merchandise and underpin the recovery.
Mayaram said he expected a further pick up in economic momentum from RBI monetary policy.
“The RBI will not hold interest rates high any longer than necessary,” he said. “I hope we will reach that threshold soon.”
He also said falling oil prices would not only help subside inflationary pressures, but would also wipe out the cost of diesel subsidies, helping New Delhi trim the fiscal gap to a seven-year low of 4.1 percent of gross domestic product.
The central bank kept rates unchanged this month, citing risks to inflation from a weak start to the monsoon rains and lingering uncertainty over the global crude oil prices.
Rains improved last month, and there are forecasts for a stronger second half to the four-month monsoon running from June through September. Oil prices have also hit a 14-month low on plentiful supplies and weak demand. (Additional reporting by Suvashree Choudhury in Mumbai; Editing by Louise Ireland)