RBI’s doing all the heavy lifting

The Narendra Modi government has come to depend heavily on RBI’s bi-monthly monetary policy review to pep up consumer demand, boost investments and reverse the economic slide. Former finance minister Arun Jaitley used to constantly complain that the RBI was not doing enough to complement measures taken by the finance ministry to put the economy back on track. Over the last eight months, the RBI has done its bit by slashing interest rates by 1.15%, which includes the 35-basis point cut on Wednesday. It has also taken care of inflation — both retail and wholesale. Though RBI Governor Shaktikanta Das has retained an “accommodative” stance going forward, the central bank will shortly exhaust its headroom to leverage the limited monetary space. It is time now to ask what Finance Minister Nirmala Sitharaman is ready to do and complement the RBI’s efforts with her own set of measures to spur growth.

The finance minister has lined up consultations with industry captains in different sectors to consider measures to arrest the slide and put key sectors like automobiles and real estate on the growth path. The concomitant challenge is also to prevent job losses in the millions from these two sectors. As pointed out by the RBI, weakening external demand across US, Europe and emerging markets would make things worse. Hence, Sitharaman will have to rely on boosting domestic demand. One way could be to work out staggered and easy repayment schedules for consumers and businesses in consultation with the RBI and banks. It is necessary to instil confidence in the industry for private investments to resume. Some large and medium industries should be able to open the investment tap given that industry is reportedly sitting on cash reserves of about Rs 8 lakh crore.

The RBI allowing banks to hike their exposure to 20% in a single non-banking finance company (NBFC) from the prevailing 15% would boost credit flows to infrastructure areas. In some cases, banks could go up to 25% in systemically important institutions and projects. Sitharaman should take complementary calls to boost fund flows to infrastructure projects to support growth. Already, RBI has revised downwards the growth prospects to 6.9%. The two quarters from September to March 2020 will be key to realising even this growth. Select sectors like automobiles, real estate, micro, small and medium enterprises (MSMEs) will need to be given a leg up. Fiscal and non-fiscal measures like improving ‘ease of doing business’ will have to be attempted. The finance minister should also focus on cutting business transaction costs.