Finance minister Arun Jaitley is the warrior who is fighting to turn the tide on the economy. It will now be purely Jaitley’s call to deploy all fiscal instruments at his command to bring the growth momentum back on track given that RBI refused to play ball on interest rates, but did somewhat ease the liquidity play. RBI governor Urjit Patel and his monetary policy committee (MPC) refused to take an accommodative outlook towards balancing inflation and growth concerns.
The multi-member MPC refused to cut the key rates at its fourth bimonthly monetary policy review. It retained the repo rate under liquid adjustment facility at six per cent. Consequently, the reverse repo rate was retained at 5.75 per cent, marginal standing facility and bank rate have been continued at six per cent.
While concerns within and outside the government was to provide a push to the growth momentum, the RBI monetary policy committee ignored these calls. Instead, the central bank stuck to its traditional style of keeping the inflationary pressure under check while revising the forecast to 4.2-4.6 per cent from the earlier estimate of 4-4.5 per cent. It also slashed its growth prognosis from 7.3 to 6.7 per cent.
Only move that could be termed growth positive was the reduction in statutory liquidity ratio by 50 basis points that would inject fresh liquidity impetus and enable banks to resume lending to the corporate sector. More than the interest rates, what’s annoying is the deepening rift between finance minister Arun Jaitley and RBI governor Urjit Patel in making concerted efforts to bring the economic growth story back on track. Its all the more disappointing that the RBI refused to even indicate the time frame for a more flexible monetary policy framework. But then that is the nature of his job.
Patel and his team should have picked up signals from the Rs 2 per litre cut in excise duty on both diesel and petrol to curb inflationary pressure building up within the economy. In the process, the government has burned a hole in its pocket losing revenue worth a whopping Rs 34,000 crore. But when you see that larger picture of no pass through to consumers and Rs 283,000 crore of revenues raised through nine successive hikes, then the cut on Tuesday finally provided some succor to beleaguered motorists.
It was time for the RBI to reciprocate and improve investment sentiment by providing impetus to growth concomitantly. Veterans like Arun Shourie and Yashwant Sinha’s attacks on Modi-Shah-Jaitley troika may be intended at making a political point. But then the issues of slowing economy and job-less growth continue to be relevant.
Instead of complementing government efforts to push up growth and jobs creation, it was critical of any fiscal stimulus package and farm loan waivers which would see slippages on the fiscal deficit front. The moot point here being that India has seen only one upgrade in the last 25 years and the economy does need an adrenaline shot.
One interpretation to RBI’s neutral stance could be that slowing growth was just transient and not a structural issue as made out by Yashwant Sinha and Arun Shourie. Hence, the RBI did not move in a hurry to cut rates. RBI’s arms length distance could also mean that the central bank was not convinced of the present leadership’s ability to manage the economy and keep the consumer price inflation at 4 per cent, plus or minus two per cent as provided in the midterm money policy review.
Though Jaitley has very limited options, there’s no denying the fact that thus far he held steadfast on the path of economic reforms, keeping fiscal consolidation intact and at the same time making efforts to push up growth with employment opportunities.
Only pointed measure to change sentiment was completed by reducing excise duty on petrol and diesel. States will have to play a complementary role by slashing the value added tax (VAT) rates to provide relief to the consumers.
Instead of attempting run away expenditure as prescribed by stimulus hawks, Jaitley has the option of moving ahead with more candidates for strategic sale through disinvestments route as done during the Vajpayee era. But for some reason this government is loath to privatising anything. Measures to increase capacity utilisation within the manufacturing sector, instill confidence in taking up green and brown field proejcts coupled with active food price management can be attempted.