It could only happen in India. The Reserve Bank of India (RBI), whose job it is to tend to the monetary system, says the price of money (interest rate) is not the only thing that matters for reviving the economy. The government, whose job is to tend to everything else, says that’s what holds the key.
Read (or decipher) what they have to say:
RBI: “The effectiveness of monetary policy in bringing down inflation… could be undermined by supply constraints in the economy, particularly in the food and infrastructure sectors. Without policy efforts…growth could weaken even further and inflationary strains could re-emerge.”
Finance Ministry: “We believe there will be enough incentive to certainly look positively at the rate cut but I am not predicting, I am not even demanding, I am only stating how I see the situation on the ground.”
RBI: “Overall, the balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing. The Reserve Bank will endeavour to actively manage liquidity to reinforce monetary transmission, consistent with the growth-inflation balance.”
Finance Ministry: “…Going forward if inflation stays low, if we can bring down food prices hopefully there will be more room.”
RBI: “Monetary policy cannot afford to lower its guard… will also have to remain alert to the risks on account of the current account deficit and its financing, which could warrant a swift reversal of the policy stance.”
Finance Ministry: “But the growth rate will not be below 6 per cent. It will surprise everyone. Investments are picking up, there are green shoots.”
So why ask for lower rates? No one knows.
Examples of this sort of crosstalk can be multiplied. Suffice it to say here that it completely reinforces the impression that those in charge of the economy will not speak about the real problem, and when they speak it at all it will only be to blame someone else, including the rest of the world.
Wait and watch: if the monsoon fails, they will blame God as well.
This “only interest rates matter” and “they are not the only things that matter” debate has been going on since 2011 when the growth rate of output began to decline from over 8 per cent to the current below 6 per cent. It has got us nowhere, not least because the banks will not co-operate. The risk, they think, is too high.
Risk and politics
The risk problem stems from the very extended and continuing political uncertainty, which began with the series of scams being exposed in 2011. This has never happened before, not for so many years on a trot.
The compulsion to survive in office at any cost has meant no action could or can be taken against any political personage who takes bribes. But bureaucrats became fair game.
As a result, decision-making came to a full stop. As one former secretary to the Government of India told me, “I am not going to jail just because some (expletive deleted) politician made money.” Many non-Congress ministers have been saying the same thing — and doing nothing. They want a level playing field in jailing for them and Congress ministers.
No decisions have meant very little or no new investment. This has meant an inevitable slowing down of the rate of growth of output.
The no or low investment problem, says the Finance Ministry, can be sorted out if loans are made cheaper. Yes, sure, says the RBI but remember cheap money can lead to inflation if you don’t sort out the policy problems that are holding back investment.
And so the ping-pong economics goes on.
The next 18 months
But who is going to fix the political problem, especially since the two key issues that the RBI has identified — agriculture and infrastructure are both in the States’ domain?
Last June, on the way back from the G-20 meeting in Mexico, the Prime Minister was asked about this. We are hoping they will co-operate, he said with a rueful smile.
He was right. The States haven’t co-operated so far. Why should they when they will be fighting the Congress soon? The penalties of their non-co-operation will be borne by the Congress, after all.
The hardest hit by this standoff are businessmen who are waiting for deliverance.
Finance Minister P. Chidambaram’s daily utterances notwithstanding, the coming elections are having the same effect on the government as on a rabbit immobilised by the headlights of a car.
Such rabbits, it should be added, tend to get squished.
tca.tca@gmail.com
