Govt must heed RBI's message

We Indians love to brag, the Government of India even more so. Every other day, from Prime Minister Narendra Modi downwards, everybody in the government reminds us that India is growing at the fastest clip among the major economies. They derive special pleasure in the exercise when we are occasionally seen to be ahead of China on the growth curve, never mind that the latter economy is 6-7 times the size of our own. Currently, Finance Minister Arun Jaitley is in America, telling all that his government has brought in institutional and structural changes that have made the economy stronger and put it on a faster growth trajectory. All this bragging may have been acceptable, had any of it been true. Most Indians know intuitively that things have gone wrong. With too few jobs to be had, they have got their confirmation.

Living in denial, or at least pretending to be in that mode for public consumption, is a feature of most governments, and the Modi dispensation is no exception. But the Reserve Bank of India has held out a mirror to the government. It must look into it seriously and with humility. GDP growth slowed to its lowest in three years at 5.7% in the June quarter; industrial growth has fallen to 1.2%. Now, even consumer confidence and spending, which had hitherto held up the economic pace, have fallen. The RBI sees inflation rising and its Monetary Policy Committee, therefore, rightly refused to lower interest rates earlier this month. Softer interest rates do generate growth in normal circumstances, but the government cannot solely rely on monetary tools for economic revival for two reasons. The RBI is mandated with maintaining a stringent inflation target of 4%. Secondly, private investment is likely to remain highly constrained even if RBI drops rates because corporates are hugely indebted and banks are unwilling to lend to them further.

The RBI has sent out some clear messages to the government. One, obviously, is that the RBI does not feel comfortable about the expected inflation trajectory to be able to drop interest rates. Two, that the onus of ensuring growth is on the government, not on the RBI, which has clearly said faster growth cannot come at the cost of inflation targeting. Three, that while the government is considering a fiscal stimulus package, the RBI does not think that now is the best time for one, given the danger of breaching the fiscal deficit target. The government must read these messages carefully, and act on the few options it is left with to revive growth.