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The RBI's neutral stance in its latest review — making a pause in its hard money policy — was somewhat predictable. In the first place, it had itself given an indication to that effect, ceteris paribus , on the last occasion. Secondly, a series of bad tidings for the economy tells us that the country is buffeted by problems both on domestic and external fronts, and cannot not bear with another dose of monetary tightening — despite inflation persisting above 9 per cent.
The multiple whammies hitting the country are well known and need not be listed here. The only silver lining in the gathering clouds is the fall in the annual inflation rate from 9.73 per cent in October to 9.11 per cent in November; though small, it has provided a breather to the central bank. More importantly, the WPI for December 3, 2011, showed the rate of food inflation drop sharply to 4.35 per cent, reinforcing the trend seen for the previous week at 6.60 per cent.
RBI can derive some satisfaction from the fact that its monetary policy actions are beginning to bear fruit on the prices front, though with a lag; its moves have led to a deceleration in the growth of aggregate demand. It could afford to shift its priority slightly towards promoting growth — not by loosening its grip on the flow of funds in the economy, but by not tightening it either.
FISCAL DEFICIT AND PRICES
The RBI embarked on a dear money policy to help the economy experience a soft landing. Vested interests try to make it appear as though the country is facing a recession. A 7-7.5 per cent growth with an inflation rate of 7 per cent expected at the end of the year is something that many countries will be glad to achieve. The trends in monetary variables so far have been satisfactory from the point of view of an anti-inflationary approach. However, it remains to be seen whether the trend on the price front is going to continue.
It is clear that with the expected non-realisation of revenue targets, ballooning expenditure and the lowering of growth estimates, the fiscal deficit will exceed 4.6 per cent of GDP envisaged in the budget. The only question is the extent of excess. It will certainly have an impact on prices, even if there is a bumper rabi crop. In that, case the declining trend in inflation may turn out to be a false dawn, calling for a return to tightening measures before long.
The press release of the central bank reveals awareness of a possible recurrence of high inflation. Rupee depreciation and oil prices are other factors to reckon with. Hence, the Bank has done well to wait and watch before relaxing the existing policy parameters, resisting pressures from official and business circles.
ELECTION IMPACT
The tempo of government expenditure is likely to gain further steam soon in view of elections to important State assemblies in the coming months. Their results might as well decide whether the UPA will have enough votes to get its candidate elected as President in mid-2012. The importance for the ruling coalition of having a pliable President in a situation of no party enjoying a clear majority in the Parliamentary election of 2014, or even earlier, needs hardly be emphasised.
Hence, the focus will be on floating new schemes before they are disallowed by the Election Commission, or expediting the expenditure on the existing ones in order to tap the vote bank before the appropriations expire on the last day of March. For starters, there is already an announcement by the Prime Minister on instituting a credit risk guarantee fund of Rs 1,000 crore soon for the poor. The UP Chief Minister has indicated her intention to ensure year-round employment guarantee for the rural residents – an initiative that the Centre may emulate at an appropriate time.
INFLATION EXPECTATIONS
The problem facing the country is not on the supply side. There is no shortage of supply of industrial or agricultural goods with the exception of coal. It is a failure of management of supplies, not of monetary policy. The real villain is to be found on the aggregate demand side. Three-fourths of the fiscal deficit budgeted for the year was ‘achieved' in seven months. There is no respite in issuing doles in the name of an employment guarantee scheme that sees neither inputs nor outputs. Now, the government is reported to be planning an advance payment of wages for work not done!
What is disturbing are the results of the two surveys on inflation expectations and consumer confidence (See RBI Bulletin , December 2011). The households in the sample expect the annual rate of price rise to become 12.2 per cent and 12.9 per cent three months and one year ahead, respectively. It should worry the central bank no end as it sets store by expectations in formulating policy.
Around two-thirds of the households are aware of the RBI's monetary actions. Of them, only about one-fourth is convinced that the Bank is doing the needful.
Of the latter respondents, less than 60 per cent feel that the RBI policies have an impact on controlling inflation. Does it mean that, by and large, even the average ‘knowledgeable' citizen does not believe in the effectiveness of monetary policy?
(The author is a Mumbai-based economics consultant.)
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