Not by rate-cuts alone

Markets were far from impressed by the 25 basis points cut in the policy rate by the RBI last Friday. They, in fact, gave a big thumbs-down to the projection of growth in 2019-20 to 6.1 per cent as against the RBI’s own estimate of 7.2 per cent only six months ago. The benchmark Sensex lost 434 points following the Monetary Policy Committee decision last Friday. With the latest repo rate cut, the total cut in this financial year tots up to a good 135 basis points. Notably, the banks had actually passed on 29 basis points to borrowers until August.

The failure of transmission is sought to be now addressed by linking the lending rate to an external benchmark, essentially the repo rate. This ought to lead to a near proximity between the two rates. But still the bigger story coming out of Friday’s announcements is the drastic paring down of the estimated growth in the current financial year. The lower projection may be in consonance with the changed economic scenario and well in line with what global agencies now reckon the growth rate will be in the current year. Yet the RBI acknowledgement of a slower growth puts the official imprimatur on it. It is true that several global agencies had already downgraded the outlook for India, with the ADB reducing it from 7 to 6.5 per cent, OECD from 7.2 to 5.9 per cent, Moody’s from 6.8 to 6.2, and likewise many others. The central bank now expects it to be 6.1 per cent, down from 6.9 per cent in the last MPC meeting in August. Indeed, if the plethora of bad news on the economic front is taken note of attaining even a 6.1 per cent growth might look highly unlikely, given that it was a mere five per cent in the first quarter of 2019-20.

Despite a very good monsoon, a benign rate of inflation, moderate food prices, and, above all, stable crude oil prices, there is no sign of an economic pick-up. It is because the overall sentiment is bad. Global factors do matter but only up to a point, investors are being held back by domestic factors. It is undeniable that the on-going drive to clean up the Augean stables of the financial sector, to go after habitual defaulters among bank borrowers, to penalize collusive transactions between banks and crooked businesses, etc. has had a negative impact on the investor community. Both lenders and borrowers have become over-cautious, slowing down fresh investment. Per latest data, off-take of bank credit has slipped to a mere 10.3 per cent. This is not enough to turbo-charge the economy to attain a high growth rate.

Indeed, even if the RBI were to cut the rate further there can be no guarantee that growth will pick up sharply. For that, more needs to be done by the government. But the government is hamstrung by lower revenue collections, higher outgo on freebies/entitlement schemes, tax write-offs of Rs. 1.45 lakh crores, etc. In other words, there is no substitute for an aggressive disinvestment programme. Given the failure to disinvest in Air India, it is futile to find a new zeal for selling off stake in public sector banks, MTNL, BSNL and quite a few other white elephants.

We are not hopeful of an immediate turn-around in the economic mood, though we wish Modi will display the same courage in the economic sphere as he has in the political sphere. White elephants which might have had some use in the socialist era when the private sector was an anathema needs must be got rid of at the earliest. Aside from the vested interests in labour unions everyone else will welcome the disinvestment and the country will save a lot of money on the huge salary bill and ever-rising recurring running costs, etc. If Modi, with an unassailable majority, does not do it, he will miss a great opportunity. Besides, he will fail the economy.

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