God forbid, but if someone held a gun to Reserve Bank of India governor D. Subbarao’s head and insisted that he justify, in one sentence, the monetary policy he announced on Tuesday, he would probably say: “We did whatever we could, but it all means nothing if the government doesn’t get its act together.”
For, doesn’t it really come down to that? Yes, with a 50 basis points (bps) cut in the repo rate, RBI has exceeded industry expectations, and also signalled a sharp change in focus from containing inflation to growth. After all, GDP growth is at its slowest in three years, and industrial production growth is dropping sharply. As for investment growth, that’s negative. Meanwhile, Wholesale Price Index (WPI) inflation, which remained above 9% during April-November 2011, has come down to 6.9% this March. So why not a rate cut, and if a rate cut, why not a big one?
Well, quite simply because if our government feels good about those inflation figures, it would be beating the most earnest ostrich at its own game. Let’s take non-food manufactured products inflation, which was 8.4% in November 2011, and has decelerated significantly to 4.7% in March 2012. What does this indicate? One, a slowdown in domestic demand. Two, if you look at corporate results, what you find is that though sales growth has not been bad, margins continue to decline. In other words, input costs are rising and producers are finding it increasingly difficult to pass them on to customers. Is that really good news?
And even the falling inflation figures are at best ephemeral. The effect of the across-the-board excise hike proposed in the Union budget is going to show up pretty soon. And how long can the government hold back on raising petrol and diesel prices? As global crude prices climbed rapidly, in India fuel inflation actually fell from over 15% in November-December 2011 to 10.4% in March 2012. This is a determinedly make-believe state of affairs. Inflation with respect to non-administered mineral oils, a much better reflection of reality, was 19.8% in March. And I’m not even mentioning the suppressed inflation in electricity and coal.
In his budget speech, the finance minister expressed the intention of fiscal consolidation and restricting subsidies to under 2% of GDP in 2012-13. But what are these intentions worth, going by the track record of this government, whose sole aim is to just hang in there, however punch-drunk, till 2014? Referring to these declarations of intent, RBI, in its monetary policy document, makes an uncharacteristically non-euphemistic statement: “In the current year, the targeted 0.8 percentage point decline in the fiscal deficit-GDP ratio…will hinge critically on substantive actions on fuel and fertilizer subsidies.”
It’s really quite amazing how almost everyone knows what is going on and no one is ready to act. In 2011-12, the government had targeted borrowings of Rs 4.17 trillion, and ended up overshooting that mark by as much as 25%. The 2012-13 budget estimates borrowings of Rs 5.7 trillion, but the government has already announced that it will borrow Rs 3.67 trillion in the first six months of the fiscal year, which is more than 64% of the total. Our current account deficit stands at 4.3% of GDP, the highest since the balance of payments crisis in 1991. If this is not controlled, the rupee will continue to depreciate, making imports costlier (including, of course, oil), and at best not having much of a positive effect if global commodity prices decline.
And, the 2012-13 fiscal deficit target of 5.1% is, of course, just an example of Pranab Mukherjee’s deadpan humour.
How on earth will inflation be contained with an out-of-control fiscal deficit and no end in sight to government wastefulness? Do we seriously expect a 50 bps cut in repo rates to be the sort of tonic Jeeves would concoct for Bertie Wooster on those hungover mornings without the government moving an inch forward on any policy front?
Egg yolk, Worcester sauce and red pepper: that’s what Jeeves’ recipe was. Instead, all we have is bottom-of-the-barrel chicanery: tax laws with retrospective effect.
The RBI statement makes it all quite clear: “Even though the Union budget envisages a reduction in the fiscal deficit in 2012-13, several upside risks to the budgeted fiscal deficit remain... The large fiscal deficit also has led to large borrowing requirements by the government… Such large borrowings have the potential to crowd out credit to the private sector. Crowding out of the more productive private credit demand will become more critical if there is fiscal slippage… Moreover, persistent demand pressures emerging from inadequate steps to contain subsidies…will further reduce whatever space there is (to reduce rates).”
In short, what RBI is saying is: look, this is the maximum we can do; in fact, we won’t be able to do much more in the foreseeable future. So let’s cut the rates and hope for the best. What harm can it after all do, compared with what our government is doing every day?