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For the first time in recent memory, the RBI may be emboldened to cut interest rates sharply.
Nothing succeeds like success.
The corollary is that, for interest rates to fall, nothing succeeds like failure on the growth front.
The slowdown of the Indian economy in the last year is precipitous. We are now below 5 per cent from 10 per cent levels a few years back and if this continues, we would be staring at a recession in the next couple of quarters or shortly thereafter. What, one might well ask, is the cause?
The drop in investment in infrastructure and new manufacturing capacities is an obvious reason. Beyond this is the rising and huge negative of the trade gap, popularly called the ‘current account deficit’. The galloping preference for personal transportation led to the rapid growth of the automobile sector but with the downside of increasing consumption of imported energy (and carbon emissions, which are a real cost and risk but not reflected anywhere in national accounts — our imitation of the West is confined to life styles). To these must be added the latest factor of falling personal consumption, whose importance cannot be overstated. New jobs in IT and services, which were major job engines, are down to a trickle, posing the serious question of how we are going to find employment for the armies of graduates churned out every year by our universities and colleges. The gloom in the job market undermines consumer confidence, the vital link to consumer spending.
Govt spending
Finally, Government spending, always a key driver of the economy, is in the slow lane, on deficit cutting compulsions.
Having advisedly (and rightly in some cases) abandoned the public sector’s ‘commanding heights’ of the economy, Government is stuck without a growth catalyst. Hence, the molly cuddling of foreign investors and ‘speeding up’ environmental clearances’ for ‘stalled projects’. (An honest appraisal of the delays would reveal a different, uncomfortable story). What is now work in progress is a near collapse of aggregate demand in the economy. We will soon see a sharp deceleration in inflation. It would be no surprise if the CPI slides below 5 per cent in the near future.
So the prospect is that the central bank will be jolted into slashing its benchmark rates in a sequence of quick moves, starting soon. It was entirely right to resist the pressure to cut rates earlier, but the economy is weakening faster than expected, justifying even pre-emptive action.
It’s the ample supply situation of the ‘ aam aadmi ’ consumption basket that gives the necessary cushion to significantly ease monetary policy.
The monsoon is off to a good beginning. Normal rains should stimulate agricultural incomes and rural demand. If only Government can prod the private sector into a pointed and focused aggressive export thrust, India’s economic prospects will be transformed overnight.
If only……
Value adding economic policies are at a discount in today’s market.
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