RBI gets its priorities right

The Reserve Bank of India (RBI) should be congratulated for its standstill policy of not making any changes in the cash reserve ratio or policy rates. It is clear that it is concerned more with inflation than growth. And if the Government wants to walk the path of growth alone, the RBI too can do so in its anti-inflation drive!

It is indeed surprising that, unlike in the past, there were no sound bytes from the Finance Ministry as to what the RBI should do in the policy review. Probably, it is the realisation that the central bank has the courage of its own conviction and not that of the Finance Ministry. The RBI can get autonomy by exercising it in policy making. When asked about monetary easing, the Chief Economic Adviser is reported to have said: “You will know from RBI’s credit policy tomorrow. We have entrusted the central bank to look at the monetary side; let it do its job.”

This is a welcome change in attitude from those of his predecessor and some of his current colleagues known to be quite voluble and freewheeling in making comments on the RBI policies. One hopes that he will pursue this level-headed approach in dealing with the queries of press men in the interests of not destabilising the markets. The mid-year review of the Government, released a day in advance of the RBI review, acknowledged the RBI’s view that a reduction in policy rates presently could stoke inflation rather than support growth. It, however, said that some recent government measures gave the RBI the legroom for a more accommodative monetary policy.

Inflation estimate

It is interesting that the Finance Ministry issued its review a day ahead of the RBI’s. But conflicting projections for the future could create confusion in the minds of the markets and the common man. Thus, the Government expects the inflation rate based on the Wholesale Price Index (WPI) to ease to 6.8 to 7 per cent by March against 7.5 per cent indicated by the RBI in its November review. The latter would like to wait till January end for its fresh assessment of the growth and inflation trajectories.

The RBI could have highlighted the irony of double-digit inflation in food prices at a time when the Government godowns are bulging with stocks and a large volume is kept in the open under the Cover and Plinth Scheme, exposing the grains to damage. It is a failure of management. But what is not understandable is the continued emphasis on inflation based on WPI, which is admitted by all as unreliable to measure the burden of price rise on the common man.

The statement that “…inflation pressures appear to be moderating” is based on WPI. When the new set of numbers based on a revised Consumer Price Index (CPI) was introduced in January 2011, we were told that it would take some time to stabilise and that comparable figures would be available after a year. One hopes there will be a paradigm change in the January review, anchoring on the CPI rather than the WPI in deciding on its policy changes.

The revamped CPI was introduced, effective January 2011, with 2010 as the base year and a larger sample size. Besides updating the base year, the new index became more comprehensive in covering a larger number of commodities and services that account for around 60 per cent of the country’s GDP, not covered either in the then existing series of CPI or the WPI. Thus, the policies were framed earlier in a vacuum with the authorities not knowing the real state of affairs on the price front. The new index also analyses price trends in services, which account for about 60 per cent of India's gross domestic product but not covered in the past.

Growth estimate

There seems to be a convergence on the growth prospects, as estimated by the Government and the RBI. The Government review has indicated it to be 5.7-5.9 per cent in the current fiscal against the RBI’s estimate of 5.8 per cent.

The RBI expects a growth momentum in agriculture, industry and service sectors. The hope for agriculture depends on the rabi crops. Although wheat, the main crop, is mostly irrigated, its output depends on the temperature variations that had done considerable damage in the past. With global warming on the rise one can only hope for the best.

On industry, there is over-optimism based on the output growth in October. Although the review admits the effect of low base and festival demand behind the buoyancy, it should have noted the roller-coaster ride of the Index of Industrial Production in the year.

The construction sector plays a vital role in creating the demand for goods and services, and hence is an important variable in policy making in the US. The housing industry seems to be in the doldrums with a large number of apartments remaining unsold in the metropolitan centres.

The problem is the unaffordability of housing at today’s levels of prices. Any reduction in repayments due to a fall in interest rate gets nullified by general inflation as the common man is not left with enough money to pay his EMI after meeting all his essential expenses.

The review is silent on the trends in fiscal deficit. Probably it is tired of whipping a dead horse!

(The author is a Mumbai-based economic consultant.)

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