Onus on pvt sector and banks to go with flow
RBI Governor Raghuram Rajan has reduced the policy repo rate by 25 basis points. The repo rate now stands at 7.5 percent. This sudden reduction in the repo rate -twice within less than two months -- may be seen in the context of lower inflationary pressures since July 2014.
Such low inflationary pressures have been on account of positive developments in the domestic economy, as also international developments.
The decline in the Consumer Price Index to 5.1 percent in January 2015 has been driven mainly by a sharper than expected decline in prices of vegetables and fruits since September 2014, a large fall in international commodity prices, especially crude oil prices, as also weak demand conditions. The icing on the cake has been the government’s commitment to reduce fiscal deficit and adhere to the fiscal deficit target, albeit delayed.
The reduction in repo rates was critically dependent on three factors: Sustained ‘high quality’ fiscal consolidation, steps to overcome supply constraints and assured availability of power, land, minerals and infrastructure. Each of these factors has a critical role in ensuring that India follows a high growth trajectory -- 8 to 8.5 percent as stated by the FM -- without compromising on the inflationary target of 2-6 percent. The current reduction has been shaped by two factors -- one, the revised GDP estimates, and second, the Union Budget 2015.
As regards the higher GDP numbers, the Governor has rightfully cautioned against accepting the higher numbers without paying heed to other evidence which may point to a less than ‘robust economy’.
Yet, the numbers do point to the picture of a recovering, if not a surging economy. The Union Budget 2015 indicates the government’s fiscal stance as one of fiscal consolidation, while providing the impetus to the private sector through high public investment. At the same time, concerns regarding hard infrastructure have been addressed through structural reforms. Other positives in the budget include the government’s intent to better target and reduce subsidies through direct transfers. However, such positive intent needs to be translated into positive outcomes. The signing of the memorandum between the central government and the Reserve Bank of India setting out clear inflation objectives for the RBI to follow is the most significant development in recent times. It sets to rest the perceived clash of macro-objectives as followed by the government and the RBI, with the former perceived to follow growth and the latter reduction in inflation. Both the fiscal authority (the government) and the monetary authority (the RBI) can be on one page now regarding the macroeconomic goals for India. It is the creation of such a comfort zone that has led to an easing of the policy repo rates by the RBI. What remains now is for the private sector and the banks to play ball and act proactively. Banks need to reduce their lending rates and thus ensure the transmission of lower interest rates; the private sector needs to take advantage of the lower cost of borrowing, as also better business prospects with the government committing to improving the Ease of Doing Business. It needs to speed up investment in critical sectors and projects. There can be no room for complaint now. As an old ditty goes, “Kuch tum chalo, kuch ham chalein.’ The private sector and the banks will have to take giant, firm steps to ensure that the agenda set out by the government and supported by the RBI gets translated into reality.
*The authors teach Economics at SPJIMR, Mumbai. Views are personal