Millennium Post

Government desperate for a rate cut

The Modi-led government is caught up in a whirlpool, with its saffron outfits igniting endless social unrest. These events are derailing Parliament and helping a determined opposition to block key legislation, intended to show up its “reform credentials”.

The Prime Minister seems to be have given more attention towards  gaining greater political ascendancy for the BJP, in effect for himself, leaving no state election to chance. He is no doubt in the process throwing up too many ideas on the economic side and raising expectations,  but without a credible framework for implementation and job outcomes.

Now, none of these new laws currently billed for adoption in the winter session is going to be of any immediate value in an economy on the slowdown. Modi’s own corporate friends would prefer more ideal conditions  for making investments, whatever the touted surge in business confidence. Those conditions are much harder to create, with many structural and other supply-side problems involved, than by simply nudging the RBI for a rate cut as if it is a sure solvent for its troubles. With Consumer Price Index dropping to  4.4 per cent, and  Wholesale Price Index at zero, as against 7.52 per cent in November 2013, the cry for a rate cut gets louder. It is possible India may even be staring at deflation for a month or two before the WPI begins to reverse itself. And in November, WPI for “primary articles” as well as food articles group within it were both below 1 per cent. All these facts do not affect the budget of the common man or the middle class, even if the latter has more disposable income.

They will continue to pay the same price as before. Some price variations are seasonal, as in vegetables. But these prices get evened out eventually. The fact remains that years of high inflation, neglected by the Government of whatever hue, have raised costs all round for the economy as a whole. The cost-push is bound to result from the Budget for 2015/16.

While wages and salaries in the organised sector are adjusted for inflation, average citizens in the unorganised sectors will continue to bear the burden that the market imposes. This is the reality no matter, regardless of the positive media spin on falling inflation. And it is no secret that power tariffs would go up with empowerment of discoms to recover costs. Also, the Railways will slap new levies, revising tariffs for freight and fares for the second year in succession.

No doubt India is reaping the benefit of the plunge in global oil prices as “Fuel and Power” index had declined by 5.4 per cent, a year on. The overall WPI decline to zero is thus the combined effect of ‘minerals’ declining by 5.9 per cent (mainly crude) and lower oil product prices pushing down the Fuel index significantly, coupled with the fall in several food items, especially vegetables. Prices still
remain firm for rice, pulses, milk and milk products, and beverages.

Lower oil prices can also boost aggregate demand, while relatively lower growth in agriculture could get reflected in coming weeks. So, WPI has not yet stabilised, much less food prices. RBI Governor Raghuram Rajan puts store by the disinflationary guide path as it emerges after December, indicating meanwhile the likelihood of monetary policy being eased in the early part of 2015.

The economy is unlikely to have made the expected recovery in the third quarter (Oct-Dec), given the less than 2 per cent industrial growth in April-October – the October data throwing up a contraction by 4.2 per cent. The banking system weaknesses with a record level of non-performing assets and other distortions can also bring into focus financial instability, one of the principal concerns for monetary policy. Now that the government and RBI are close to an agreement on inflation target of 4 per cent plus a margin variation of 2 per cent, a new framework for monetary policy is expected to come into force from 2015/16. But in today’s conditions, with fiscal consolidation not in sight and many questions on  Government’s ability to hit the fiscal deficit target of 4.1 per cent of GDP, maybe due to factors including deferment of sizeable disinvestments to early in 2015, it is premature to talk of fiscal and monetary policy moving in tandem to foster growth.

The Modi-led government has not shown any signs of a single-minded focus on strengthening macro-economic stability, prioritizing the tasks to clear, as much as possible, the obstacles to stronger recovery of the economy in the current year itself. Everything now seems centred on Finance Minister Arun Jaitley’s Budget for 20015/16 to be presented by the last week of February. While Government has been taking some steps to make it easier to doing business in India, these have not made the desired impact so far. A lot more needs to be done. Since Jaitley is already gung-ho on what all he intends to accomplish in that Budget, domestic business and foreign investors alike would await for that “game-changer”.

The Budget will be designed to put India back on its growth trajectory, with a target well above 6 per cent in the coming year itself. Jaitley has promised to unveil  “second generation” reforms, and one major area of investors abroad is what he would do with retrospective taxation.  Jaitley has decried “tax terrorism” and hinted at a rational and stable tax system, which would make cost of capital more reasonable. He has also indicated a larger opening out in more sectors, lessening of tax burden on middle class and a further pruning of subsidies in the light of the recommendations of the Bimal Jalan Expenditure Reforms Commission. Prime Minister Modi has offered red carpet welcome for foreign investments, on which his Government depends a great deal over vast areas of the economy besides agriculture, irrespective of  the emphasis on “Make in India”.

All this would also need the right political climate for unhindered progress, according to rating agencies. The government’s progress will be dependent on how it assuages the concerns of the opposition in Parliament. IPA


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