For all practical purposes, nearly everyone has given up on an immediate policy revival; the cynical lot believe it will last till the end of the tenure of the Congress-led United Progressive Alliance (UPA), while the more optimistic argue that the situation will alter once the ongoing game of Kaun Banega Rashtrapati (Who will become the 13th President?) is over.

As a result, the focus has inevitably shifted to the Reserve Bank of India (RBI) and to what it can do to contain the macroeconomic slide.

All the more, since the mid-quarter review of the credit policy by RBI is due on 18 June at a time when economic growth has dropped to its lowest levels in nine years and retail inflation has topped double digits with the headline inflation not far behind.

The release of data on industrial production in April and the Wholesale Price Index for May later in the week should provide for better clarity. Unfortunately, the run-up to the review has seen RBI convey the message of a house divided with two deputy governors speaking at cross purposes even as international developments threaten a new climax.

Testing times: RBI governor D. Subbarao. Photo: Hemant Mishra/Mint

Any untoward development in either country could trigger a contagion that would reverberate across the world. In the US, President Barack Obama has seen what should have been an otherwise comfortable re-election turn into a possible cliffhanger against his Republican party rival as the economy faces the tailwinds from Europe even while struggling with its own structural infirmities.

India, too, cannot remain insulated, especially since, like most other countries, it has exhausted all its fiscal ammunition (not to speak of its political will) with which it could have mounted a rearguard action. The consequences undoubtedly could be devastating, including in India, despite the silver linings that some quarters have been touting.

The good news for RBI is that somehow Indian industry, the big hitters at least, is taking the cue that the downturn is a blip and the long-term story on India is still positive. The latest to sign on to this is Reliance Industries Ltd (RIL), India’s second largest company by market capitalization, which promised an investment rollout of Rs1 trillion. Addressing the company’s annual general body meeting last week, company chairman Mukesh Ambani maintained that RIL is looking to “align its own growth to India’s growth as a strong, prosperous and self-confident nation".

“We believe that India is poised to be one of the growth engines of the global economy over the next decade. Its demographics, talent pool and a democratic society give it a unique position among emerging countries globally," Ambani said.

A day later, Mint reported that automobile manufacturers are taking a similar bet. The trend story published on 9 June indicated that three auto makers— Mahindra and Mahindra Ltd, Maruti Suzuki India Ltd and Hero MotoCorp Ltd—have announced plans for factories with a combined investment of more than Rs11,750 crore. They are all betting on the emerging consumer economy —the signs are visible in the first phase of growth—that will be built around the anticipated rapid urbanization and economic growth.

Clearly, money talks, and Indian industry is unambiguously indicating that it is willing to walk the talk. But no matter how brave and determined they are, it is a fact that industry will need a complimentary ecosystem. In this, the biggest impediment are domestic interest rates; these have already forced up costs of companies and also forced exposures (some questionable) to foreign currency loans in a volatile exchange rate environment.

However, RBI faces a difficult choice. Which macroeconomic variable does it look at? Double-digit inflation or rapidly decelerating growth—which has already begun to derail the unprecedented momentum that the economy had acquired in the last decade? Undoubtedly, a disciplined Union government could have made all the difference if it had done more than being a mere paper tiger when it came to tackling the fiscal deficit—or gross borrowings of the government.

Regardless of which way RBI calls, there are serious consequences for the economy. In more ways than one, it will be the toughest choice faced by RBI governor D. Subbarao; this says something for a man who took charge in the midst of the Lehman crisis that triggered the 2008 global economic crisis. All eyes on RBI then.

Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com

Also Read | Anil Padmanabhan’s earlier columns

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