Too cautious

The Monetary Policy Committee has missed a chance to cut the repo rate, bite the bullet on non-performing assets, and give the economy the push it needed in the wake of demonetisation. It remains apprehensive of inflation while at the same time acknowledging that India’s fundamentals as well as global confidence in its growth prospects remain sound; this is borne out by the surge in portfolio flows since February 2017 despite the Fed rate hike in December, a benign current account deficit of 0.7 per cent of GDP owing to a combination of moderate oil prices and a turnaround in exports, and a fiscal deficit that is well within limits. With global headwinds evidently having receded since 2016, and India’s industry in need of a boost, it is inexplicable that the RBI should step back and leave the task of reviving the economy entirely to banks — expecting them to transmit the earlier cuts and leverage the surge in deposits post November 8. With investment trending at a five-year low, job-creation languishing in the organised sector in 2015-16, and sections of the Government conceding that the Q3 GDP numbers may not have captured the impact of demonetisation on the unorganised sector, the MPC should have signalled growth as its priority, especially as bank credit growth is at a historic low of barely 5 per cent. However, the policy seems singularly focused on mopping up excess liquidity with the banks in the wake of demonetisation (it has hiked the reverse repo rate) without really channelising it into the real economy, except stipulating higher investment in REITs (real estate investment trusts) and INVITs (infrastructure investment trusts). However, any increase in funds for these sectors would be subject to provisioning norms. Lower interest rates could have spurred productive forces by lowering the marginal cost of funds while also improving demand for housing and consumer durables. While savers certainly need protection, banks could have addressed that by improving returns for those who rely on interest income.

The MPC projects an inflation rate of 4.5 per cent in the first half of 2017-18 and 5 per cent in the second half, while pegging gross value added growth at 7.4 per cent, against 6.7 per cent in 2016-17. The threats to inflation, in its view, could arise from an indifferent monsoon, seventh pay panel payouts and prices of services. However, it appears that the MPC, perhaps burdened by its inflation-targeting mandate, is focused on prices at the expense of jobs and growth.

The RBI could also have been open on how much of the demonetised currency actually returned by December 31. Equally odd is its silence on how the sudden drop in currency in circulation in public, from ₹16 lakh crore on March 31, 2016 to about ₹12 lakh crore a year later, will be dealt with. Assuming that digital transactions will take time to bridge the gap, this shortfall may impact the economy. The policy approach needs to be less “neutral”, going forward.

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