On Thursday, the Reserve Bank of India’s Monetary Policy Committee further lowered the key lending rate or repo rate by 25 basis points to 5.75 percent. This was widely expected. It is the third successive time the MPC has cut the rate since Shaktikanta Das took over as Governor, RBI. Also, the six-member committee changed the policy stance from ‘neutral’ to ‘accommodative’. The committee unanimously took the above decisions. Growth forecast for the current fiscal year was lowered to seven per cent from the earlier 7.2 per cent in April. Revised inflation projection for April-September quarter was slightly up at 3-3.1 per cent from 2.9-3 per cent. The central bank’s medium term target for inflation is four per cent. Ten-year bond yields dipped nine basis points after the announcement of the policy. There could be scope for further easing given the economic slowdown, especially in the last quarter of 2018-19 and in view of the unlikelihood of a sharp pick-up in the first two quarters of the current financial year.
Another 25-basis point cut in August cannot be ruled out given low inflation and continuing concerns about growth. The big challenge for the central bank is to ensure adequate transmission of rate-cuts, with most banks failing to pass fully or even partially the benefit to their borrowers. In his press conference after the MPC meeting, Das said the central bank would ensure a ‘faster and higher’ transmission by commercial banks. Whether the lowering of the interest rate would provide the required fillip to the key sectors of the economy remains unclear.
High interest rates is only one of the factors for the slowdown. Excess capacity, poor demand, continuing debt burden, huge inventories, etc, are some of the other factors. But post-notebandi and GST, investor confidence has suffered a blow as economic players are still struggling to re-orient themselves to conduct their businesses in a fully transparent way. Moreover, there is hardly any cheerful news for the new Finance Minister. On Thursday, it was reported that tax collection targets for the current year as set in the interim budget may be difficult to achieve. Respective departments want the Finance Minister to lower them up to six percent when she presents her budget for 2019-20 in early July. Growth projections for both direct and indirect tax collection targets might have to be lowered in view of the slowdown. A 31-percent increase in GST collection as projected for 2019-20 seems highly difficult in view of the slowing economy. And direct tax collections rising by 34 per cent in the current year too seems unrealisable.
The Central Board of Direct Taxes has asked the minister to peg down the targets in her budget. Keeping the budgetary projections in line with the actual economic conditions will be a challenge for Nirmala Sitharaman who in her maiden budget would like to evoke great hopes of an economic revival. But there is dearth of good news around, with the corporate world coming under strain daily following exposure of mismanagement and irresponsibility at its top.
After the ILFS collapse last year put a question mark over Rs. 94,000 crores of debt, the latest to cause panic is DHFL whose failure to make interest payments crashed the net asset values of several debt schemes. The ILFS crash last year had forced even premium mutual funds to postpone maturity payments by over a year. These are only two glaring examples of a troubled financial sector whose woes have had far-reaching consequences for other sectors of the economy.
For instance, the real estate. How her maiden budget will help revive this crucial labour-intensive sector needs to be seen. Meanwhile, the creation of two separate Cabinet committees on investment and growth and employment and skill deployment underlines the crises as well as the new government’s commitment to tackle them. Apart from the Prime Minister, Home Minister Amit Shah, Finance Minister Sitharaman and Commerce and Railways Minister Piyush Goyal are members of both these committees. Growth and job creation having become key challenges for Modi-2.0, the constitution of the two committees could result in closer coordination among key economic ministries for removing the structural and other bottlenecks in the path of faster growth.