Wednesday, November 27, 2024
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A delicate balance

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By Ramesh Kanitkar

The Reserve Bank of India’s annual credit policy, considered as the second biggest economic event after the budget, has brought cheer on the faces of India Inc and the market, heralding a new era of hope for the government, which had almost halted on reforms of late.

RBI governor D. Subbarao has done the unthinkable, cutting interest rates to the tune of 0.5 per cent — the sharpest in three years and also nudged the bank CEOs to find a way to reduce rates. Clearly, the message is to deliver, pass on the rate cut immediately to home buyers, businessmen and investors, whose lacklustre performance has contributed in further slowing down of the economy.

But, will the rate relief prove enough to stir activities in the system ignite production levels and bring back stalled reforms on track? No, say the analysts. The government policies have to support the RBI’s actions, without which the virtuous steps may turn vicious. The government is completely in an inactive mode today. At a time when it should indulge in how to bring back the economy on the rails, its focus has shifted to dealing with an uncooperative coalition.

True, there are structural problems plaguing the economy. The economic growth is at a three-year low price rise has not shown a definite sign of moderation, industry is showing slackening signs and government’s uncontrolled expenditure programme has failed to rein in the fiscal deficit. At this juncture any deft handling of a huge liquidity released into the system can be disastrous. The money has to go into productive usage and not for the purposes other than asset creation. Analysts also opine that if the money gets drained into the government’s huge borrowing programme of Rs. 5.7 trillion, it will only spike inflation, which has still not abated.

The RBI has taken a very bold step despite the macro-economic parameters including GDP growth, inflation, interest rate and exchange rates not being in the pink of their health.

The widening trade deficit and slowdown in capital inflows are weighing down India’s key macroeconomic indicators.

To elaborate on a few, let us take inflation first. It is true that the none-food manufactured inflation has come down in the past four months to March sending out strong signal to investors to have faith in the economy and continue investing. What about food inflation and latent fuel inflation? Food prices are still not anywhere near the comfort zone.

And, fuel prices are ruling lower than what they should have been only because the government is trying to suppress it in the past three to four months only for the fear of being thrown at the margins by the Opposition and the antagonistic allies.

Crude prices are hovering around $120 a barrel. The last time petrol prices were raised, crude was around $113 a barrel. The continuous rise in crude and the government’s inaction on fuel prices has only added to its ever rising subsidy burden. So much so, that the oil marketing companies have almost threatened to increase petrol prices by as much as Rs.8 a litre because (they say) they are bearing the brunt of Rs. 49 crore a day on account of selling fuel below the market rate.

But, the government, aware that allies like Trinamool Congress may not allow it to rationalise energy prices, is treading cautiously over the issue. It does not want any ally to rock the coalition boat on the price issue.

Then, there is the problem of current account deficit, the excess of imports of goods and services over exports that has crossed 4 per cent of the GDP in December quarter breaching the comfortable level of 3 per cent.

This, along with the fragile global environment and unresolved problems in Europe, exposes the country to the risk of capital outflows and a consequent volatility in the rupee. Of course, this is a grim reminder of the situation faced in 1991.

Then too, the CAD was close to 4 per cent of GDP due to a sharp rise in the import bill driven by surging oil imports and a slow rise in exports. The government had to depreciate the rupee by close to 25 per cent to regain export competitiveness, borrowed $2.2 billion from the International Monetary Fund and pledged 67 tonne gold with the Bank of England and the Union Bank of Switzerland and raised another $600 million, since there were no foreign investments flowing in.

Today, nobody would wish to have such a situation because Indian economy has moved many miles ahead compared to those days. It is much bigger in size, more open and many times more competitive. But, the economy watchers fear and even finance minister Pranab Mukherjee cautioned just a couple of days ago that any complacency at the time of weak external environment can cost dear. The RBI has done its bit by putting monetary policy in place. Now, the government needs to do its bit and that, according to experts is possible only if it sheds its image of policy inertia and comes back to action.

Reforms in almost every area is warranted, be it tax reforms, infrastructure, marketing, industry, project clearance or agriculture sector reforms.

There is a vision, there are plans, there are timelines too, but the will to implement is lacking somewhere, because there is a fear, the fear from opposition, the fear from a couple of unrelenting allies. The government has to bite the bullet for once, leaving behind all apprehensions or else the bold move by the RBI may lose its sheen. INAV

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