Two figs, three cookies, five almonds and a rectangle of cake. The goodies on the white ceramic plate at Reserve Bank of India (RBI) governor Raghuram Rajan’s briefing on Tuesday presented a contrast to the sumptuous slice of rate cut he had announced in the morning. The half a percentage point cut was twice what the market and experts had hoped for. Was the bigger cut a result of sustained pressure? The last few weeks, it seemed there was always someone somewhere asking for a cut in interest rates.
“What do you think?” The governor shot back, sharp as his dark suit. It did seem to have played a role.
“You know only one side of it. There have been pleas, there have been threats.”
Threats? Turned out he was not being serious.
“But, seriously, there have been pleas.”
He could say that again. In the recent weeks, everyone — from policy makers to policy advisors to businessmen — had pointed towards Rajan for seemingly holding up India’s economic growth by refusing to cut interest rates.
“But you have a job to do. So you must look at the medium term and decide what must be done. Otherwise, everyone and his uncle have an idea about how to run the economy and how to run the RBI.”
What did he see in the medium term?
For one, the global situation has changed even from as recent a time as August. In the interim, China happened.
So global growth certainly looks weaker, but the inflationary environment has gotten better because, it seems, a revival in commodity prices will take longer. “We are not doling out these things (rate cuts), we are responding to the needs of the economy. This is what we do... There will be demands and threats.”
Now that the lending rate has been cut, will economic growth get back on track?
As one might have suspected, that will depend on a host of other factors. “Monetary policy cannot do it on its own, all the other policy guns have to fire.”
What about investment? The government has been talking about increasing public investment. The Prime Minister has urged industry to take risk and invest. But much of the private sector is already buried under a mountain of loans.
Business has always been difficult in India, said Rajan, more so in recent years with the slow pace of governance. The new government is at least trying to create a better business environment.
Whatever it achieves should be seen as a bonus for industry, which has learned to function under difficult circumstances. For instance, the private sector made tremendous investments in 2005-06, just before the global financial crisis set in, even though the business climate was none too great.
“If we wait for the Scandinavian environment, we may wait forever.”
It is investment that will revitalise domestic demand in a sustainable way. That is important because, given the global slowdown, exports may remain subdued.
Some of it is happening. A number of bank chiefs have spoken to Rajan enthusiastically about road construction, which seems to be gathering speed. Of course, the country could do with much more of that. A clean-up of power distribution companies would go a long way.
What about errant promoters of businesses? Rajan has been tough on them.
“I don’t want to sound like a crusader, but we have to get the assets back on track. For that, if some bad promoters have to be removed, so be it. If some good ones have to be recapitalised, so be it.” The good thing is that banks have become more firm in dealing with promoters.
Rajan’s bigger concern, though, is the cause of the turmoil in the emerging markets. Is it caused by excessive debt? “There are alarming estimates of debt build-up in some countries.”