Lone walker

Finance minister P Chidambaram’s fulminations at RBI’s intransigence on further adjusting the reverse repo rate downward has more to do with the bruised sentiments of thwarted pride. The incestuous relationship between credit expansion and micro-economic growth has never been as tenuous as in times like these – when a cyclical slowdown has all but blown away popular economic linkages between stock markets and the economy, or repo rate revisions linked to strong economic growth, and to positives for the market, manufacturing, agriculture, exports, and what not. The last two mentioned -- agriculture and exports -- are in fact largely protected from interest rate fluctuations through subventions provided to banks by the government. And, credit offtake in the farm and rural agro infrastructure sectors has been dismal.

With an uncharacteristically stiff upper lip, RBI has not ventured to give a fiscal 2013 outlook vis-à-vis credit and deposit growth for the agricultural sector in its quarterly policy review, but has encouraged banks to go in for higher provisioning against bad loans. That speaks for itself. Previous repo rate cuts have not impacted the credit situation. Material trends in credit absorption can be evident only when demand and supply side constraints are effectively addressed. Tepid demand conditions lead to risk aversion in the corporate and banking sector. This has been reflected in lower credit expansion by the public sector banks. Is it Chidambaram’s case that in the face of tepid demand conditions and falling credit offtake to industry, and despite the series of rate cuts by the RBI since 2010, a further 25-50 bps repo discount would dramatically alter the situation? On the other hand, RBI’s past interest rate cuts have helped the larger companies to tap the commercial paper (CP) market . But CP fundraising is still not preferred by small and medium industries, while banks whom they approach are wary of ‘collateral’ damage.

 It is a point of debate whether pumping in Rs 17,500 crore via a CRR cut would change the rules of the game for SMEs. The fiscal deficit roadmap outlined on Tuesday does not explain how the dawdling disinvestment process will move forward, or revenue collection reforms for schemes like the proposed 900 MHz spectrum refarming. Against fears that the government’s fiscal deficit target is a move from zero to infinity, Chidambaram’s programme of “walking alone” has a hollow ring to it.