Chance missed to spur growth

The Reserve Bank of India has refused to budge from its position of adopting a cautious monetary policy stance, despite the fact that the inflation level is now more comfortable than before. It has kept up its inflation vigil at the highest. This is something of an alarmist view.

It looked as though there was a little window of opportunity to encourage the growth impulses at this point of time. While overall inflation remains at above 7 per cent, food prices can be expected to come down somewhat in the winter months.

It is seen that the sensitive food prices, items which mostly contributed to rising food inflation, namely, fruits and vegetables, potato, onion, eggs and meat, generally show softening trends in the winter months following larger arrivals in the markets.

Two years back, potato and vegetable prices had, in fact, collapsed in winter months. This is because with larger arrivals in the markets, and no worthwhile cold storage chains available, a lot of these items even go waste.

Thus, prices tend to dip in response to the boost in supplies and the need to clear the stocks.

Rationale for push

Core inflation — which is roughly the prices of manufactured goods — has been showing a lower rate for some time now.

Even at this point, the price rise of manufactured products is, by and large, within the comfort range of the Reserve Bank. The core inflation level of about 5 per cent should be retained as the rate going down further will become an intimidating factor for the manufacturing sector.

Why should a change have been introduced now? The RBI’s policy statement itself states that time has now come to tilt a little towards growth in its balancing act between growth and inflation.

It observed: “In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards.”

However, when it came to taking action on this observation, the central bank sought to play it safe and keep its options unutilised.

This will harm the growth spurts and the green shoots that are visible and have been referred to in the mid-year economic analysis of the Finance Ministry.

Some recent figures indicate, and the Finance Ministry pointed out, that in several areas the Indian economy has bottomed out.

Last figures of industrial production also showed a surprise pick-up in the capital goods sector, consumer goods and consumer durables segments.

Even if we take the revival in consumer goods sector as response to the festive season demand, the improvement in capital goods is something not seen for many months. This needs to be nurtured now.

The capital goods performance actually is a pointer to the level of investment and this has been a laggard.

The Prime Minister’s Economic Advisory Council had pointed out this weakness in several of its reports. Now that there some indications of a revival here, the primary thrust should have been to give a push. This could have been done by a cut in interest rates.

Global example

Superimpose the global situation on this. India’s exports have been going down continuously of late. The last figures on trade indicated further loss of ground.

Although the Commerce Ministry has pointed out that a raft of measures for boosting India’s sagging exports should be put in place, the effectiveness of such intervention remains a matter of question.

Generally, Indian exports rise when global trade is rising. As at present, global exports are on a downswing and Indian exports might remain subdued for at least in the medium term. Hence, the growth drivers will have to be domestic.

Other countries are following such a logic. The US has continued its aggressive policy stance with further doses of “quantitative easing” through ‘Operation Twist’.

Massive money is being pumped into the system by buying up long-dated securities and thereby flushing the market with funds. The UK has followed suit.

European economies are giving new and newer sops. The last one was to create a mechanism for faster intervention and funding to banks in difficulty.

China, similarly, is introducing its “rebalancing” measures to encourage domestic demand to keep growing.

We in India are following a different story. Fiscal policy intervention cannot be reasonably asked for, given the runaway deficit.

In fact, we are going through a process of fiscal contraction to keep the overall deficit within some limits. To maintain the growth impulses, very few options are available. Monetary policy stimulus could be the main one among them.

In its guidance, the RBI promises some loosening of its policy in the last quarter. In its last statement as well, the central bank had given guidance of possible relaxations.

Hopefully, it will redeem its promises next time. Mere promises are not good enough.

(The author is a Delhi-based commentator.)

COMMENT NOW