Will RBI governor Raghuram Rajan lower interest rates in the December 2 monetary review is the question most corporates are asking. The NDA government inherited a high inflation rate of over 10%. Both Union finance minister Arun Jaitley and Rajan quickly realised and firmly stated that controlling the rampaging monster was high priority.
The Consumer Price Index for October has shown hopeful signs and the retail inflation rate has declined to 5.2%. With the rate showing a trend of better than targeted decline should not the RBI lower interest rates to stimulate investment and growth? Rajan has made it clear, and quite rightly too, that the RBI must be convinced that the structural issues which cause inflation are brought under control before the reins can be slackened.
Jaitley has two fundamental concerns —first, tackling inflation, and, second, bringing down the fiscal deficit from 4.5% to an acceptable level. The NDA’s promise of ‘good days’ rests on creating more employment and more income for the people. In September, industrial production showed signs of stirring but the production of consumer durables fell by 11%. If it is a sign of falling demand, alarm bells must be ringing. If the RBI continues to wait for stronger economic signals to delay a boost to the manufacturing sector will we see a return to the days of tension between the two that in fact brought Rajan in?
The Indian dilemma on inflation is in stark contrast to the economic situation unfolding in Europe and to some extent in Japan, the United States and Russia. The Eurozone is now lapsing into stagnation and deflation. British Prime Minister David Cameron has minced no words saying that “red warning lights are flashing on the dashboards of the global economy”. Japan is sliding into recession at a time when the Eurozone is already into a third recession. Cameron’s warning is something India cannot ignore. The protagonists of an easier monetary policy in India are hoping that the RBI is taking these signals seriously. Earlier financial crises have shown that it is unwise to discount the ripple effects from elsewhere that can shake India as well.
On the other major concern — fiscal deficit — lady luck seems to be smiling on the NDA government. The much-needed decision to do away with fuel subsidy could not have come at a better time. It coincided with the fall in oil prices from $115 a barrel to $85. It is an unexpected boon. However, due to the problems in oil producing countries like Syria, Iraq and Nigeria, the long-term prospect of low oil prices holding therefore is uncertain.
Jaitley would perhaps like to grab this bit of luck and present in the next budget a more cheerful message to industry and prepare the grounds for a long-term structural reforms package.
When the first economic reforms were started the then Union finance minister had quoted Victor Hugo to say that nothing can stop an idea whose time has come.
For Rajan, the time is now.
(MP Bezbaruah is former secretary to the government of India and member, Northeastern Council. The views expressed by the author are personal)