Too many accolades are being showered on RBI Governor, Mr Raghuram Rajan for maintaining status quo in regard to repo rate (rate at which RBI lends money to banks) and cash reserve ratio (CRR) (portion of deposits bank keep with RBI).
In view of consumer price index (CPI) spurting to over 11% during November, 2013 and even whole sale price index (WPI) increasing to 7.5%, stakeholders were anticipating an increase in repo rate by a minimum of 0.25%. Mr Rajan has surprised them by not increasing thereby sending them in a celebration mode.
However, there is no room for complacency as the under-current of RBI policy statement continues to be hawkish. The Governor has made it abundantly clear that inflation data will be under watch. In case, expected softening of inflation in coming months does not materialize, a hike may not be ruled out.
He has even alluded to the possibility of hike – if warranted by unfolding price data – even before the next policy statement due in the fourth week of January, 2014.
RBI may say that it is as much concerned about resurrecting growth. This is out of tune with its stance. Since September, Mr Rajan has already jolted the economy with 2 hikes of 0.25% each. And, even now, there is no indication that he will loosen the string.
Indian GDP growth plummeted to 5% during 2012-13. During first quarter of 2013-14, it further decelerated to 4.4%. In second quarter too, it continues to languish at around 4.8%. Government may be hoping for a rebound during the remaining 2 quarters, but emerging trends do not inspire confidence.
Demand is slackening across all major sectors viz., consumption (public & private); investment; intermediates etc. Demand for social services which normally gets propped up due to Government spending may suffer more during second half as it tightens belt to rein in fiscal deficit at 4.8%.
There is too much of hype over an expected rebound in agriculture. Our policy makers are expecting an agricultural growth of 4.6%. Even if, this is achieved, what they do not realize is that agriculture has a share of only 14% in GDP. Therefore, contribution to overall growth may not be much.
These underlying weak fundamentals should have prompted a more proactive policy intervention from RBI. The need of the hour is a drastic reduction in interest rate. This is a must for propelling investment in the private sector – to resurrect growth – especially when Government has no money to invest.
Cabinet Committee on Investment (CCI) has cleared projects worth several billions of dollars. Government exudes confidence that their implementation will start kicking growth during second half of current fiscal and beyond. High interest rate – a major speed breaker – can frustrate these plans!
RBI needs to get out of a long-nurtured mindset (all thru under Mr D Subbarao and now the incumbent flamboyant Mr Rajan) that believes in ‘allegedly’ using interest rate to anchor inflationary expectations. In Indian context, there is total dis-connect between the two.
Yet, obsession to see a link has led us to a situation whereby we have neither growth nor control on inflation.
That the Governor recognizes that inflation is a ‘supply’ side problem is no consolation. Mere recognition and exhorting Government to take steps to tackle supply bottlenecks will not help. RBI needs to assert its autonomy and stop playing ball to the Finance Ministry.
At the root of India’s economic ills including inflation and slow growth lies Government’s unfettered fiscal profligacy. This in turn, is driven by reckless spending on welfare schemes and ballooning subsidies. A huge slice of trillions of rupees spent on these do not even reach those for whom these are meant.
RBI helps this profligacy by providing full support to Government’s borrowing program and ensuring latter’s access to cheap money. That leaves less and less money for productive use. And, whatever comes is at higher cost.
Rising monster of NPAs (non-performing assets) – a manifestation of delinquent borrowers, many of them ‘wilful’ defaulters – and Government’s/RBI lenient attitude towards them has only exacerbated the problem of high cost money for genuine investors.
At the same time, excessive money funnelled through subsidies and welfare schemes inflates demand and even gives hoarders a leg up. Much of inflation that we have seen in prices of food and vegetables especially onion has been due to hoarding funded by plenty of cash doing the rounds.
It would be naive to see inflation merely through the prism of bank credit or interest rate as there are other forces at work – exacerbated by Government utter neglect of fiscal discipline and RBI meek surrender to such acts.
Until RBI liberates itself from shackles of fiscal imprudence, India will neither have a decent growth nor check on inflation.
Will Mr Raghuram Rajan bite the bullet?