Govt should aid a turnaround that India is desperately seeking
The RBI governor Raghuram Rajan pleasantly surprised many when he maintained a status-quo on interest rates. The government should use this unexpected breathing time to speed up project implementation.comment Updated: Dec 18, 2013 23:50 IST
The Reserve Bank of India (RBI) governor Raghuram Rajan pleasantly surprised many when he maintained a status-quo on interest rates on Wednesday. He kept the repo rate — the central bank’s key lending rate — unchanged at 7.75%, despite inflation remaining many notches above the RBI’s “comfortable” 5% levels. Instead, the RBI has pinned its hopes on a downward trend on the inflation curve.
This expectation is built on the premise that food prices have come down dramatically over the last few weeks as fresh supplies of winter vegetables flood the market. As the new crop enters the market, food prices should stabilise. This is precisely what had played out in the early months of this year when wholesale inflation had dropped by nearly one percentage point in a month.
There is, however, a bigger message in the credit policy: there is enough proof that all’s still not well with the Indian economy. Factory output continues to remain in the negative zone, a sign of a crippling industrial slowdown. The main reasons for the payback in industrial output growth were the persistent contraction in capital goods and considerable weakness in the consumer goods segments.
In the absence of real-time investment data, which by definition can be collated only with a lag, capital and consumer goods output offer the closest approximation to incremental asset creation activity and people’s shop-end spends. A reduction in both of these can, therefore, imply two basic trends: companies are deferring investment plans and people are putting off purchases.
The RBI has also made it clear that it would rather wait and see how the inflation curve starts moving over the next month before contemplating any more rate action. If it continues to remain sticky at levels beyond the comfort zone, the RBI would not hesitate to increase lending rates. In effect, it has put the economy on a few weeks’ watch mode. The government should use this unexpected breathing time to speed up project implementation. The onus is on the government to aid a turnaround that India is desperately seeking.