Governor Rajan has emphasised the need to boost domestic savings. At some point India’s saving rate has reached 35 per cent of GDP. It has slid down in more recent years. We seem to be doing precious little to encourage financial savings. Interest income on fixed deposits with banks is taxed, while income from equity is exempt.
The monetary policy decisions announced on 29th October by RBI Governor Raghuram Rajan are based on an assessment of global and domestic macroeconomic situation. The outlook for global growth has improved modestly. Domestically, strengthening export growth, revival of some services with the expected pick up in agriculture could increase GDP to 5% for 2013-14. This is slowdown no doubt but there is nothing to be panicky about. This is the central theme sought to be emphasised by Governor Rajan in his policy pronouncements which exude a sense of modest optimism.
The main policy measures taken on the 29th October were:
1) Raise Repo rate from 7.5% to 7.75%.
2) Reduce marginal standing facility (MSF) rate from 9% to 8.75%.
Since both the wholesale and consumer price inflation are likely to remain elevated in the coming months, the need to control inflation become imperative and hence the rise in Repo rate. At the same time, reduction in the MSF rate will boost liquidity.
Fortunately, the markets reacted positively to the sensex shooting up a three year high to reach 20929 on 30th October. Added to this exuberance, was the good news from the real sector. The output of eight core sector industries grew by 8% in September — the fastest in a year.
The inflow of Foreign Institutional Investors (FIIs) has resumed. Investors have realised they do not want to miss out on India. FIIs will be positive for the full year. Foreign Direct Investment (FDI) during April-August was 813 billion. Has the slowdown bottomed out and can we expect a faster growth? These are positive factors which are good enough for celebration?
On the external sector, the improvement in export performance over the last two months, coupled with the contraction in non-oil imports has enabled the economy to look forward for improvement in current account deficit (CAD). We are thus not vulnerable to fluctuations in the foreign exchange market, even if the tapering off US Fed’s facility takes place. External risk have thus declined.
On inflation, Dr Rajan has insights into the phenomenon. It is erroneous to argue that supply constraints have exacerbated the situation. It may be true of onions but so far food grains are concerned, the supplies are ample with the public sector stocks swelling. There is IT sector in which there is wage inflation. Even to Mahatma Gandhi Rural Employment Guarantee scheme (MGREGA) has boosted rural wages. It must thus be recognised some sections of the population have benefitted by inflation.
If this complexity of inflation is appreciated adequately, it becomes clear that lending rate to corporate sector is not central to policy. Recently, Dr. Rajan has said that industry is obsessed with the lending rate – a theme I have been expounding for a long time. Even in terms of job creation we have to depend on sectors other than industry — agriculture and allied activities and informal sector.
In this context Governor Rajan has appropriately stressed the objective. “Expanding access to finance to small and medium enterprises, the unorganised sector, the poor and remote and under served areas of the country through measures to foster financial inclusion”.
Dr Rajan has also explained how bad governance has contributed to slowdown of the economy. He cites both the coal allocation and spectrum allocations. If we had followed transparent and merit-based allocation, things would have been better. There would not have been this inordinate delay in the exploitation of coal resources and there would have been no escalation of costs. In term of macro management of the economy these lessons from experience should be borne in mind. Retrospective taxation also affected adversely the attitude of FIIs towards India.
Finally, Governor Rajan has emphasised the need to boost domestic savings. At some point India’s saving rate has reached 35 per cent of GDP. It has slid down in more recent years. We seem to be doing precious little to encourage financial savings. Interest income on fixed deposits with banks is taxed, while income from equity is exempt. In this context the
announcement that Inflation Indexed
National Saving Securities (IINSSs)
will be launched for retail investors in
November-December 2013 is welcome. In the final analysis, sustainability of growth is dependent on domestic saving and investment.