So the RBI has done it, as some perceptive observers felt it would. It has, like an unbending uncle in a joint family, nagged by the children and nudged by the patriarch, finally given in: “All right! Here! Take it! Don’t cry!”

That’s the kind of sentiment that seems to have motivated the central bank’s expected (by expert watchers) acquiescence to a rate cut and a CRR shave.

But unlike the relenting uncle in the extended family who walks off in a huff after giving in, the RBI has to explain its actions, perhaps to itself. Governor D. Subbarao attempted a rather feeble rationale for this moves. Here he is: “First, wholesale price inflation and its core component, non-food manufactured products inflation, have softened through the third quarter. This provided some relief from the persistence that dominated the first half of the year.”

Not all pleased

Perhaps it is this sentiment that prompted some post-cut churlishness at the modesty of the trim; if WPI has fallen, a stronger action would have been more appropriate.

Commentators such as A. Seshan in this paper have pointed to the poor reasoning of the central bank’s repo rate cut in the face of inflation as measured by the CPI, by which most Indians, even policymakers let it be noted, live still in double digits.

The RBI’s hand has been forced against its better judgment. Policymakers need to convince those stakeholders they are most concerned about that they do act decisively and consensually.

The central bank, it would seem, had, of late, struck a discordant note with its insistence on price stability; with the repo rate cut, it has now found the right music score which is, of course, that of economic growth to the refrain of “Yes we will!”

Governor Subbarao admitted as much when he acknowledged that monetary policy had aligned with fiscal policy for a common cause. In return, in New Delhi, Deputy Chairman of the Planning Commission Montek Singh Ahluwalia gratefully acknowledged the RBI’s team spirit.

‘Spin’ hides real issues

So the RBI has indeed ‘fallen in line’. But to what end? Given the caveats it has mentioned in its macroeconomic and monetary policy review a day before announcing the cuts, it is hard to escape the conclusion that it has been forced to endorse a policy of evasion, an elaborate spin script that obfuscates the real issues impeding growth of a sustainable kind.

Think of inflation. The central bank cannot help consider it and remember its mandate of price stability when it cautions: “However, further moderation in inflation going into the next fiscal year is likely to be muted as the correction of under-pricing of administered items is still incomplete and food inflation remains elevated. Accordingly, the setting of monetary policy has to remain sensitive to these conflicting pressures and attendant risks.”

But New Delhi has been for some time peddling the notion that such food inflation has really been caused by rising rural demand, following increasing purchasing power consequent to administered prices and employment schemes such as NREGA. This argument has been ingested by global investment banks and economists; in 2011, JP Morgan was quoted by a financial paper attributing food inflation to rising demand and inelastic supply.

The argument has two subtexts: one, complimentary to policymakers, implies a resounding success in rural upliftment schemes and second, a consequent but inevitable fallout, temporary as it may be, of pressure on prices.

The argument is seductive; it has been widely disseminated. But why should supply remain inelastic? Is it not the policymakers’ task to ensure speedy supplies from food stocks that are rotting away, a waste commented upon by the Supreme Court, profligacy explicable only by the poverty of public policy?

Then consider the following, an economic reality cloaked in spin. In its Macroeconomic and Monetary Developments review for the year, the RBI highlights the reasons for current growth’s deceleration. Sluggish investment activity — not low consumption demand — explains the dull state of affairs.

Why is this the case? “…investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures.”

Here is an objective reality shrouded in falsehoods and evasion. Projects are delayed; firms bidding for road projects have yet to achieve financial closure. Land acquisition is a problem that has been caused — let it be known — by faulty policies.

Then comes a falsehood beamed by New Delhi and State-level policymakers and swallowed whole by the RBI: environmental clearances, the central bank informs us, have abetted the delays in investment activity.

The numbers don’t add up

Evidence put together by the Centre for Science and Environment clearly suggests something different, at least in the case of coal mining. Contrary to the view of the North Block and the proponents of the National Investment Board, the MoEF has been clearing projects with considerable alacrity.

Here, for instance, are the findings that are available on the CSE Web site (www,cseindia.org): “The 11th Five Year Plan put a target of 78,700 MW of additional thermal power capacity; the 12th plan asks for 100,000 MW. In the past five years, till March 2012, the MoEF has granted environmental clearance to an astounding 2,17,794 MW of thermal power capacity — in other words, 40,000 MW more than what has been proposed till 2017!”

If the CSE has got things right, the MoeF has virtually gone overboard in speeding up investment proposals, perhaps faster than the proposed National Investment Board could have done. Yet the RBI is right in faulting project delays. As the CSE notes soon after offering us evidence of the Environment Ministry’s complicit and compliant attitude towards coal projects: “Worse, the capacity actually added during 11th FYP was a mere 53,000 MW.”

Assume for a moment that the CSE hasn’t got it right, that the MoEF is really holding things up. Any policymaker worth his salt would not ask to dispense with environmental clearances, but probe into the manner in which those regulations have been implemented.

Investments will not pick up with a repo rate cut and more funds with the banks. The environment is stained far too much with corruption, sloth and increasingly, the empty gesture. Interest rate cuts are just that, simulacrums posing as authentic action.

Related Topics