Worrying signals for the economy

A demand-side intervention, perhaps a tax cut, is in order

The Reserve Bank of India (RBI) should have done more when its Monetary Policy Committee met this week. It eventually cut the policy rate by 25 basis point (0.25 percentage point) which is, at best, a half-hearted measure to revive growth and, at worst, tokenism. This newspaper, in a column, had suggested that a one percentage point cut would be the only thing that could work (in combination with several other measures), but some analysts and bankers were expecting RBI to cut the rate by 50 basis points at the most. That the central bank has done this even while lowering its GDP growth expectations for the year (20192020) from 6.9% to 6.1% is worrying. It is the kind of thing that could spook nervous investors (and many are nervous right now) into asking whether there is something the central bank knows that they don’t.

More worryingly, data from RBI shows that adjusted nonfood bank credit to the commercial sector from banks was negative in the year to September 13. It was positive only on account of lending by non-banks, but much lower than the number in the corresponding period a year ago (and also since 2016 at least). Either companies are not borrowing, or banks are not lending. It’s easy to see why investment growth isn’t happening. The corporate tax cuts should help, but clearly RBI doesn’t see that happening in this financial year.

The policy comes against the immediate backdrop of the crisis at Punjab and Maharashtra Cooperative Bank, laid low by its exposure to one company, HDIL, which, until 2008, was part of the same family business group as DHFL, the shadow bank whose debt woes have roiled finance circles (before that, it was IL&FS, and neither crisis has been resolved completely). RBI and the government have to think of a more aggressive plan to address the crisis in the finance sector, which is definitely larger and runs deeper than previously thought. For at least a year now, there has been a suspicion that the IL&FS crisis is only the tip of the iceberg, and sure enough, similar instances have been surfacing at regular intervals.

Finally, RBI’s growth estimate only strengthens the case for an immediate demand-side intervention — perhaps individual income tax rate cuts of the same magnitude of the corporate tax cuts that are being spoken about.