Walk the talk, Mr. FM

“The Fi­nance Min­is­ter is piqued that RBI Gover­nor D. Sub­barao re­fused to suc­cumb to the brazen, pub­lic pres­sure brought on him to cut the pol­icy rate.”

The Pak Banker - - Front Page - Raghu­vir Srini­vasan

THE gov­ern­ment must de­liver on prom­ises and then wait for the RBI to act P. Chi­dambaram is hurt and an­gry. He is hurt that the Re­serve Bank of In­dia (RBI) has not helped him with a rate cut. And he's an­gry that the Old Lady of Mint Street has re­fused to do his bid­ding.

The Fi­nance Min­is­ter is piqued that RBI Gover­nor D. Sub­barao re­fused to suc­cumb to the brazen, pub­lic pres­sure brought on him to cut the pol­icy rate. The in­sin­u­a­tion from Mr. Chi­dambaram's state­ment on walk­ing alone which will prob­a­bly rank along­side the "I don't lose sleep over the mar­kets" quote of Dr. Man­mo­han Singh when he was fi­nance min­is­ter, as a quotable quote is that the gover­nor doesn't care about growth.

But does he have to? The cen­tral bank has mul­ti­ple re­spon­si­bil­i­ties, the two im­por­tant ones be­ing manag­ing in­fla­tion and cre­at­ing favourable con­di­tions to pro­mote growth. Based on the pre­vail­ing eco­nomic sit­u­a­tion, the cen­tral bank shifts its weight to one or the other of its two pri­mary man­dates. In its wis­dom, it is now fo­cus­ing on con­trol­ling in­fla­tion and main­tain­ing mone­tary sta­bil­ity. Dr. Sub­barao may be con­cerned about the growth slow­down, as he in­deed said on Tues­day, but his big­ger worry now is about hold­ing prices.

But what has the gov­ern­ment on its part done to rein in the fisc and pro­mote growth?

In the last one month and more, diesel prices have been marked up­wards a wee bit while the cook­ing gas sub­sidy has been capped. There have been mea­sures to drive cap­i­tal in­flows from abroad by loos­en­ing FDI norms in sec­tors such as re­tail, pen­sion and avi­a­tion and also mak­ing it eas­ier for com­pa­nies to raise funds abroad. Suit­able noises were also made about rais­ing funds from dis­in­vest­ment to bridge the fis­cal deficit.

And then came the grand press con­fer­ence on Mon­day, on the eve of the RBI's pol­icy an­nounce­ment, where Mr. Chi­dambaram laid out a "road map" for fis­cal con­sol­i­da­tion promis­ing to rein in the fis­cal deficit to three per cent by 2017. For­get for a minute that this was a not so sub­tle move to ex­ert pres­sure on the cen­tral bank to cut rates the next day.

Did the Fi­nance Min­is­ter re­ally ex­pect the RBI to act based on mere state­ments of in­tent? Es­pe­cially in the light of its re­cent ex­pe­ri­ence, no­tably in the Bud­get, where the then Fi­nance Min­is­ter, Pranab Mukher­jee, made prom­ises that were not kept?

The fact is that the gov­ern­ment has only it­self to blame for the growth slow­down. High in­ter­est rates are cer­tainly an im­por­tant fac­tor but not the fac­tor for the slow­down in the econ­omy which is di­rectly trace­able to the pol­icy in­ac­tion of the last three years. Projects have been held up for want of en­vi­ron­men­tal clear­ances and due to land ac­qui­si­tion prob­lems. The Land Ac­qui­si­tion Bill, good or bad as it is, would at least have cleared the way for projects to pro­ceed but it has yet to see the light of day. An im­por­tant fac­tor be­hind the slow­down is the lack of ad­e­quate power sup­ply not to talk of the scams tum­bling out ev­ery­day which are also hold­ing up de­ci­sion-mak­ing by bu­reau­crats who are keen to cover their backs even at the cost of in­ac­tion.

So what are we talk­ing here about the RBI not sup­port­ing the gov­ern­ment in driv­ing growth? If any­thing, the cen­tral bank has been ex­tremely un­der­stand­ing of the gov­ern­ment's con­straints and did its bit by "front­load­ing" a 50 ba­sis point rate cut in April based on as­sur­ances by the gov­ern­ment of rein­ing in the fisc. It has also been reg­u­larly prun­ing the cash re­serve ra­tio in or­der to free up liq­uid­ity, which in it­self is a mea­sure that can lead to a fall in in­ter­est rates. Re­mem­ber, de­spite the tight leash on the pol­icy rate by the RBI, in­fla­tion has re­mained sticky. Given its core man­date of in­fla­tion tar­get­ing, the RBI could cer­tainly not be expected to loosen its pol­icy.

Dr. Sub­barao de­serves a round of ap­plause for stand­ing up to the gov­ern­ment and re­main­ing fo­cused on the im­por­tant job of rein­ing in in­fla­tion. Cyn­ics may say that given that he has only an­other year to go, he does not have to please any­one and could there­fore af­ford not to bend. Yet, he has proved him­self to be a wor­thy suc­ces­sor to Dr. Y.V. Reddy who in his time also staved off tremen­dous pres­sure from the gov­ern­ment on the is­sue of cut­ting rates. Though re­viled then for his hawk­ish stance, Dr. Reddy is to­day ac­knowl­edged as the man who kept the global fi­nan­cial tur­bu­lence from wash­ing onto In­dian shores.

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