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Numbers game

The Reserve Bank of India on Tuesday left policy rates unchanged at its latest monetary policy review. The benchmark repo rate remains unchanged at 6.75 percent. Cash reserve ratio (CRR), or the segment of a bank’s deposits maintained in cash with the central bank, also stands unchanged at 4 percent. Finally, the statutory liquidity ratio, which is the amount that banks hold in government bonds, stood at 21.5 percent. “The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 percent by March 2017,” said the central bank in its statement. Despite already having cut interest rates by 125 basis points this year, the banks have reduced their lending rates for the consumer by only 75 basis points. Moving on to demands from the industry to further cuts interest rates, the RBI urged caution. Speaking to the media, RBI Governor Raghuram Rajan said that the central bank will have to wait and assess the impact of the recent spurt in retail inflation driven by high food prices. In October, retail inflation had risen to a four-month high of 5 percent. The prices of pulses though are of serious concerns with a hike of 33.25 percent in all due to a shortfall in production. Meanwhile, a deficient northeast monsoon and lack of soil moisture have affected the sowing of wheat and pulses in the Rabi season. For the uninitiated, the July-September monsoon accounts for about 80 percent of India’s total rainfall and affects both summer and winter crops. A second consecutive drought year has resulted in a fall in rural demand, an indicator of prosperity in India’s villages. The declining sale of tractors and motorcycles are indicative of the fall in rural demand. In the first half of the current financial year, tractor sales fell by 20 percent. Motorcycle sales have seen a 4 percent decline year-on-year in the current financial year until October 1. The fall in rural demand is further confirmed by a slump in rural wages, as per recent data published by the Union Ministry of Labour. The central bank, however, expects consumer price inflation to stand at 6 percent in January 2016, unchanged from its earlier forecast. “While urban consumption is showing signs of a pick-up in some areas such as passenger vehicles sales, rural demand has been weakened by two consecutive deficient monsoons and slowing construction activity. Nevertheless, new project announcements as measured by the Centre for Monitoring Indian Economy grew more strongly in the second quarter,” said the central bank. However, the central bank did raise its doubts on whether the higher public investment can lead to a rise in private investment. Therefore, the Centre’s announcement on Monday that the Indian economy grew 7.4 percent in the July-September quarter compared with 7 percent in the previous quarter caught many by surprise. There are two major elements to the recent spurt in growth, as per government data. One is the revival in investment demand. From last year, gross capital formation has increased by 6.8 percent. For the uninitiated, gross fixed capital formation includes improvements to key infrastructure. More than gross capital formation, however, the rise in GDP was accounted for by a spike in private consumption. But the spike in private consumption is mainly relegated to urban India. Meanwhile, the manufacturing and services sector, according to recent data, also grew at a healthy rate, further contributing to the rise in GDP. Suffice to say, other economic parameters do not indicate rising growth. Corporate profitability remains muted. For the July-September quarter, according to a report in the Business Standard, “aggregate profit growth at both the operating and net level grew at only under 1 percent over a year-ago period”. Meanwhile, the growth in bank loans remains subdued. Between September 2014 and September 2015, bank loans grew by 8.1 percent. However, between October 2014 to October 2015, bank loans fell to 8.1 percent, according to data published by the RBI. What’s worse, the amount of non-performing assets (NPAs) in banks, especially those among the public sector, saw a reported rise in 26.8 percent over a 12-month period ending in September 2015. As of September 2015, NPAs stood at Rs 3,36,685 crore; an increase of Rs 71,000 crore, according to credit rating firm CARE. Growth in the manufacturing sector, meanwhile, is at odds with a recent Morgan Stanley report, which said, “The stock of stalled projects climbed in the September quarter while existing capacity is being underutilised”.  Finally, between April and October 2015, exports fell by 17.6 percent. A growth rate of over 7 percent with falling exports seems a little implausible. To be fair, however, the government has achieved certain important targets. “The government has not only reduced the fiscal deficit, as the numbers for the April-October period show, it has also vastly improved the quality of the deficit,” according to a recent report in Mint. Key structural reforms, however, have not been forthcoming. 

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