The Reserve Bank of India has yet again cautioned the Government against excessive public expenditure as it could lead to fiscal consolidation and prove to be inflationary
In its fourth bi-monthly monetary policy review for the current year (announced on October 4), the Reserve Bank of India (RBI) has kept the policy rate (rate at which the central bank lends money to commercial banks) unchanged at 6.0 per cent. This has come as a rude shock to industries and businesses especially the small and medium enterprises (SMEs) which were anxiously looking forward to a cut for giving a much-needed fillip to growth. The SMEs are at the core of Prime Minister Narendra Modi’s agenda for promoting growth, creating jobs and increasing income. Under the MUDRA (Micro Units Development Refinance Agency) Yojna, the banks have so far disbursed loans worth Rs 3,20,000 crore to about 75 million Indians. A lower interest rate could have helped self-employed persons in reducing their loan repayment installment under the scheme.
At present, India is confronted with dip in GDP growth for 5 consecutive quarters, this being more pronounced during the last two quarters namely January-March, 2017 and April-June, 2017 when growth slipped to 6.1 per cent and 5.7 per cent respectively. This can be attributed primarily to demonetisation and GST (Goods and Services Tax) both of which are necessary to bring about a structural transformation in the economy for benefits in the medium to long-term. The Government is working on all fronts to minimise the short-term pains of these revolutionary steps, smoothen the transition and keep up the momentum of growth. These steps include addressing glitches in implementation of GST and recovering tax/penalty on the mountain of unaccounted cash deposited in banks (post-demonetisation) to use the resources thus generated to support social welfare schemes, increase government capital spending and improve the ease of doing business to encourage private investment.
As projects are kick-started, small businesses get a push, affordable housing schemes — in both urban and rural areas — gather pace and investment in infrastructure projects viz. highways, roads, ports, airports, rails, irrigation et.al., get a leg up. All these will need financing at lower interest rates. This is needed to make Indian goods and services competitive more so in international markets (to increase exports) and make available essentials like housing at lower prices. The reduction in policy rate has to be viewed in this larger perspective of accelerating growth and creating jobs. But, this does not seem to figure on the priority list of the RBI, despite it recognising the downturn and even revising its estimate of growth for the current year first to 7.3 per cent — down from its earlier estimate of 7.4 per cent — and now further down to 6.7 per cent in the current review.
The RBI has also cautioned the government against indulging in excessive public expenditure even if only to boost growth as that would risk fiscal consolidation and prove to be inflationary. Team Modi is fully conscious of its responsibilities in this regard and is acting very much within the limits of fiscal prudence. It is fully confident of sticking to fiscal deficit target of 3.2 per cent of GDP for current year.
However, for spurring growth, it was looking forward to the RBI for extending a helping hand which the latter is unwilling to concede by maintaining a so-called neutral policy stance. In February, 2017, even while avoiding a rate cut, it had changed its stance from accommodative to neutral and has since stuck to it in all subsequent four reviews (April, June, August, October). A neutral stance does not commit India’s central bank to lowering the rate though even with an accommodative stance there is no guarantee that it would reduce interest rate (as happened in December, 2016). The sole reason for RBI’s intransigence is that it does not want inflation to go out of control. Even in this regard, the Monetary Policy Committee (MPC) which decides the rate has chosen to ignore RBI’s own dictum that it can go soft on interest rate if the consumer price index (CPI) is within target range of 4 per cent [+/-2 per cent] on either side. During the first half, CPI was 2.0-3.5 per cent whereas for the second half, it is estimated to be 4.2-4.6 per cent. So, inflation is well within the target range. Yet, the MPC has refrained from a cut in the policy rate.
The committee justifies its decision in terms of a number of upside risks to inflation viz. farm loan waiver, deficient rains (in some districts), implementation of 7th pay commission recommendations and global risks such as an increase in oil price. It is hard to fathom how any of the mentioned factors would trigger inflation. A loan waiver does not put more money in the hands of the farmer. All that it does is to exempt him from paying back a portion of his pending dues. The pay commission award does put more money in the hands of employees. Here again, it is absurd to surmise that this will fuel inflation. Far from that, it will help industries hamstrung by low production (courtesy low demand) to improve their utilisation rate and even go for fresh investment further propelling growth. Any impact on food prices is ruled out as demand for such items is limited by consumers’ needs/diet constraints. As for oil price, it should be noted that since 2014, the impact of cartelisation by OPEC (Organisation of Petroleum Exporting Countries) has been substantially dented by abundant supply of shale oil and gas from USA. Consequently, the Indian basket of imported oil is much more diversified now making it less vulnerable to the machinations of OPEC. On balance, it is estimated that the global oil price will remain benign.
In a nutshell, RBI is overly concerned about inflation — and much of its concern is based on imaginary dangers. At this juncture, the economy faces demand compression including for capital goods. The Government is pulling out all the stops to give growth a boost. The RBI should help the Government instead of becoming a hurdle.
(The writer is a freelance journalist)