Wide differences emerged on Tuesday in the assessments of the state of the economy by the Reserve Bank and the Modi government.
“People should have different estimates… I have explained the basis of our Economic Survey forecast and let’s see how it pans out,” Chief Economic Adviser Arvind Subramanian said with regard to the RBI’s announcement in its monetary policy review that it was lowering projection for growth to 7.6 per cent from 7.8 per cent it had forecast in April. The government’s projection in the Economic Survey was that India is headed for 8 per cent-plus growth this year and on course for 10 per cent expansion in the near future.
The economy may not be doing as well as latest impressive growth numbers suggest, Reserve Bank Governor Raghuram Rajan said in Mumbai on Tuesday, after announcing the monetary policy review in which, he cut the policy rate to 7.25 from 7.5 per cent — a move that is likely to result in lower borrowing cost for individuals and corporates.
“The policy today is neither conservative nor aggressive … It’s a Goldilocks policy, just right for the existing situation,” Dr. Rajan said.
Though on Tuesday, Chief Economic Advisor Arvind Subramanian welcomed the Reserve Bank’s policy announcement, just a week ago he had at a press conference in Delhi made a strong case for an “aggressive” monetary policy from the RBI. In the short term, economy needs support to boost consumption, private investments for stronger growth, Dr. Subramanian had said.
“Looking at the analysis of what is the inflation forecast, what is the fiscal consolidation, what is the international environment ... and how monetary policy should respond, I think there is scope for monetary easing.” He also cited the low rate of inflation and under-control fiscal deficit and said India needed to act to keep its currency competitive in view of the aggressive rate cut policy of China and other countries. “China is cutting interest rates quite aggressively … That makes their currency even more competitive and has implications for Indian exports as well as imports from China and manufacturing on the whole … So we need to respond accordingly.”
At Tuesday’s monetary policy announcement, Dr. Rajan also said that the Reserve Bank’s further decisions would depend on data, leading many observers to conclude that unless the economy shows strong signs of picking up no further interest rate cuts can be expected from him all year.
Wait and watch
“We have to wait and watch,” Dr. Subramanian said about further rate cuts. He also said that the government and the Reserve Bank “agree that these cuts signify that the economy needs policy support as economic growth is recovering while the external environment remains weak.” Both sides, he said, “will work together to ensure that the macroeconomic remains strong while investment and growth are accelerated towards their potential.”
