P. Chidambaram is hurt and angry. He is hurt that the Reserve Bank of India (RBI) has not helped him with a rate cut. And he’s angry that the Old Lady of Mint Street has refused to do his bidding.
The Finance Minister is piqued that RBI Governor D. Subbarao refused to succumb to the brazen, public pressure brought on him to cut the policy rate. The insinuation from Mr. Chidambaram’s statement on walking alone — which will probably rank alongside the “I don’t lose sleep over the markets” quote of Dr. Manmohan Singh when he was finance minister, as a quotable quote — is that the governor doesn’t care about growth.
But does he have to? The central bank has multiple responsibilities, the two important ones being managing inflation and creating favourable conditions to promote growth. Based on the prevailing economic situation, the central bank shifts its weight to one or the other of its two primary mandates. In its wisdom, it is now focusing on controlling inflation and maintaining monetary stability. Dr. Subbarao may be concerned about the growth slowdown, as he indeed said on Tuesday, but his bigger worry now is about holding prices.
But what has the government on its part done to rein in the fisc and promote growth?
In the last one month and more, diesel prices have been marked upwards a wee bit while the cooking gas subsidy has been capped. There have been measures to drive capital inflows from abroad by loosening FDI norms in sectors such as retail, pension and aviation and also making it easier for companies to raise funds abroad. Suitable noises were also made about raising funds from disinvestment to bridge the fiscal deficit.
And then came the grand press conference on Monday, on the eve of the RBI’s policy announcement, where Mr. Chidambaram laid out a “road map” for fiscal consolidation promising to rein in the fiscal deficit to three per cent by 2017. Forget for a minute that this was a not so subtle move to exert pressure on the central bank to cut rates the next day. Did the Finance Minister really expect the RBI to act based on mere statements of intent? Especially in the light of its recent experience, notably in the Budget, where the then Finance Minister, Pranab Mukherjee, made promises that were not kept?
Itself to blame
The fact is that the government has only itself to blame for the growth slowdown. High interest rates are certainly an important factor but not the factor for the slowdown in the economy which is directly traceable to the policy inaction of the last three years. Projects have been held up for want of environmental clearances and due to land acquisition problems. The Land Acquisition Bill, good or bad as it is, would at least have cleared the way for projects to proceed but it has yet to see the light of day. An important factor behind the slowdown is the lack of adequate power supply not to talk of the scams tumbling out everyday which are also holding up decision-making by bureaucrats who are keen to cover their backs even at the cost of inaction.
So what are we talking here about the RBI not supporting the government in driving growth? If anything, the central bank has been extremely understanding of the government’s constraints and did its bit by “frontloading” a 50 basis point rate cut in April based on assurances by the government of reining in the fisc. It has also been regularly pruning the cash reserve ratio in order to free up liquidity, which in itself is a measure that can lead to a fall in interest rates. Remember, despite the tight leash on the policy rate by the RBI, inflation has remained sticky. Given its core mandate of inflation targeting, the RBI could certainly not be expected to loosen its policy.
Dr. Subbarao deserves a round of applause for standing up to the government and remaining focused on the important job of reining in inflation. Cynics may say that given that he has only another year to go, he does not have to please anyone and could therefore afford not to bend. Yet, he has proved himself to be a worthy successor to Dr. Y.V. Reddy who in his time also staved off tremendous pressure from the government on the issue of cutting rates. Though reviled then for his hawkish stance, Dr. Reddy is today acknowledged as the man who kept the global financial turbulence from washing onto Indian shores. It is the karma of central bankers, not just in India, to suffer pressure from their governments but few have managed to hold their own as Dr. Reddy did then and Dr. Subbarao is doing now.
As for growth, it is now for the Finance Minister and the government to walk the talk; convert all the tall promises made into action on the ground. And then wait with hope for the RBI to act!
raghuvir.s@thehindu.co.in
