It is not a pleasant task for policymakers in the fastest growing major economy to crawl out of the world’s worst financial crisis in seven decades, only to run into two consecutive drought years. Data released this week confirms that on top of all this, just when we thought we had put its worst behind, heat-struck April turned out to be a cruel month, with retail inflation snapping a three-month decline at 5.39% and industrial growth crawling at 0.1% in March, down from 2% a month earlier.
This is a time to take a deep breath and internalise a fundamental truth of India: the monsoon is a major variable here and the economy should not be measured simplistically in the yardsticks of the West. Finance minister Arun Jaitley and Reserve Bank governor Raghuram Rajan need to show creativity that looks beyond macroeconomic orthodoxy. This is not to say they need to throw caution to the winds. It is time perhaps to use the levers of foreign exchange reserves to cool food prices. If, as forecasters say, the monsoon is above normal this year, we may heave a collective sigh of relief. But the hangover of the drought that has affected 330 million Indians is such that consumer demand may continue to be weak, hurting industrial revival. Controlled food prices with well-managed imports as a lever may provide much-needed elbow room for an industrial rebound, even if there is no further interest rate cut anytime soon. Consumer food price inflation at 6.32% is up from 5.2% a month earlier, punched by pulses. The undercurrent is worrying.
We think the government and RBI should collectively ponder to see if they can selectively ease interest rates for farmers with a special window that goes beyond priority sector lending rates. Mr Rajan may also want to help a rescheduling of loans with a pro-active approach that can meet genuinely hurt borrowers half-way. The wait for a solid economic rebound has become too long, and some calculated risks may not be a bad idea. The credibility enjoyed by both Jaitley and Rajan as articulate spokesmen should be used to evangelise India’s unconventional policies overseas. Mr. Rajan may want to look at underlying details rather than mechanically look at his inflation target of 5% for for March 2017. We need to shift from orthodox rigidity to intelligent flexibility, even as we pray the rain gods bless us.