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S. Balakrishnan

It must have been one of the easier Monetary Policy announcements for the RBI. In fact, it had done most of the work, in terms of repo and Cash Reserve Ratio cuts, much before the Policy. Events moved so fast in financial markets and the economy then that the RBI did not have the luxury of contemplation and time. Like the US Fed and other major central banks, it had to act in a hurry.

The 25 bps lowering of the repo rates is more symbolic than anything significant. It confirms that the RBI still sees the risk of downside, although, for the present, it is practically done with cuts.

Banks have been continually exhorted to provide adequate credit. They have largely heeded the advice. Despite the halving of the growth rate, credit expansion in 2008-9 was more or less the same as in the previous year. Banks have not been found wanting in coming to the aid of companies and businesses in temporary difficulties because of a build-up of inventory and debtors.

Among the main engines of growth in the boom were software exports and offshore IT services. Those have now become a prime casualty of the US collapse, costing not only many existing jobs but also more new jobs. It is a major growth dampener. And, to the extent portfolio capital flows buoyed domestic demand, the now diminished foreign appetite for emerging markets is another negative.

Lower and absent incomes hit consumer demand — witness the retail sector gone belly up. The same fate has overtaken the real estate sector.

It is characteristic of a rapidly growing economy brimming with optimism about the future that consumption and investment in housing and durable goods become front ended, accelerating the growth rate. When the bubble is pricked, the same phenomenon operates with a vengeance in reverse — precisely the situation now.

The bottom line is that monetary policy is not a magic wand — and the RBI surely knows it.

For its part, the Government has been generous in its pay settlements with its employees. It has not got its economics entirely wrong. For, Government expenditure is a well-recognised demand stabiliser in recessionary times — although some may quibble about the means.

Government seems bereft of ideas. No headline-grabbing projects or programmes, executed with speed, efficiency and missionary zeal (as China is doing), to put the economy on the fast track. There is a misconception on reviving consumption demand. Contrast this with President Obama’s vision of a sustainable long-term growth strategy.

And it is not as if there are no urgent needs or priorities, whether we talk of infrastructure, energy, water or the social sectors.

More Stories on : Economy | Credit Policy | Financial Scan

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