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RBI alone can’t boost growth

The government has to step in and complement its efforts

editorials Updated: Jun 06, 2019 20:20 IST
Hindustan Times
Growth is the primary consideration of the Reserve Bank of India (RBI) right now — and things are not looking good(Aniruddha Chowdhury/Mint)

The Monetary Policy Committee(MPC)’s third rate cut in a row since February took the policy rate to a level not seen since July 2010, sending out a clear signal that growth is the primary consideration of the Reserve Bank of India (RBI) right now — and things are not looking good. The RBI’s MPC also cut its growth estimate for 2019-20 from 7.2% to 7% and changed its stance from “neutral” to “accommodative” sending out another clear signal — that there will be more cuts should the situation require them. The cut was expected. Growth in the Indian economy fell to its lowest in five years, 5.8% in the three months ended March 31, according to government data.

India has problems on both the investment and the consumption front. Investment in the economy has slowed, as has, at least in the months in the run-up to the policy, consumption. MPC’s statement acknowledges both. It is unlikely that a 25 basis point cut will reverse either of those trends, but it will not do any harm either. The central bank was right to use the only tool in its armoury to tackle the issue. Inflation has remained under control too, and is well within the bank’s 4% plus-or-minus 2 percentage points comfort zone, and this has freed its hand further. It is also unlikely that the cut will be transmitted through (and this has been an ongoing problem). Several experts believe this is because of the liquidity situation and the RBI has agreed to create a working group that will look at all aspects related to liquidity and, perhaps, suggest a new regime. RBI said this report would be ready by July.

There’s little else RBI can do to boost growth — although it can, and should, double down on its efforts to resolve the bad-loans crisis that refuses to go away and start looking seriously at a crisis that is now definitely on in the shadow-banking sector. To have an IL&FS followed so soon after by a DHFL suggests more unpleasant surprises may be in the offing (although, in truth neither of these themselves was a surprise). RBI’s signalling of the gravity of the situation, and also of its willingness to do what it can, should now be complemented by efforts from the finance ministry and the government. Private demand will take at least a few years to recover. It is time for the government — one re-elected with a resounding mandate that came about party because of its welfare schemes — to prime the pump, and perhaps even power it for a few years.

First Published: Jun 06, 2019 20:20 IST