Growth versus inflation

The persistent fall in private investment over the last few years is a serious problem in the Indian economy. The rate of investment at 26.5% of the GDP is the lowest since 2004-05. Yet the RBI kept the repo rate unchanged at 6.25 percent in its recent Monetary Policy review (February 8, 2017). Even when the WPI and CPI have been showing record lows and the retail price inflation dropped to 3.2 percent in December. Instead of bringing down the interest rates to encourage investment, the RBI stuck to a ‘neutral’ policy stance. Instead, it has been nudging banks to lower lending rates. Many banks like SBI have already done so with marginal cost based lending rate (MCLR) down to 8 percent, but in the face of a big rise in deposits post monetisation, they may not be able to reduce lending rates further. A lower rate would have helped real estate and ease borrowing costs for house buyers. Housing demand across key cities have already declined by 3 percent largely due to uncertainty post demonetisation which led to very few transactions materialising in both primary and secondary market between October and December 2016. Read also | < style="color: #960f0f">India is adopting digital payments like never before, but cash too seems here to stay The RBI’s cautious move has been due to the present state of the world economy in which crude oil prices are expected to move up in due course and are already doing so quite rapidly. This will affect the fuel costs in the Indian economy dependent on imports of oil (80% of total requirements). WPI has already nudged up a little recently to 5.25 percent in January 2017 on the back of higher fuel costs. The recovery of the US economy is, however, almost certain and there is bound to be another upward revision of interest rates which will attract footloose capital (FIIs) back from the emerging markets to the US. Already there was an exodus of FIIs in the last months of 2016. Hence lowering the interest rate further in India would not be of help in attracting them back as there would be a wider rate differential between the two countries. Another reason for remaining cautious is that metal prices are bound to shoot up after President Trump’s announcement of a big fiscal stimulus and increase in infrastructural spending that will be inflationary and may lead to hardening of metal prices. On the other hand, industrial production in India needs revival urgently. The IIP sank to 0.4 percent between April and November 2015-16. Due to low base, IIP, however, rose to 5.6 percent in November 2016 which was a positive sign after it had contracted for the preceding three months. In December 2016, IIP contracted again by 0.4 percent. It showed a fall in factory output and 2 percent decline in manufacturing. Overall, the consumer goods segment declined by 3 per cent and 17 out of 22 industry groups in the manufacturing sector showed negative growth. The corporate sector was near stagnant at 0.1 per cent growth in 2015-16. Clearly demonetisation has affected industrial growth adversely and it came at the wrong time when the production of capital goods had declined sharply. Credit growth had slowed to 10 percent in 2015-16 as compared to 13.2 percent 2014-15. This was because of problems of worsening balance sheets, the corporate sector borrowed less and postponed investment decisions. Read also | < style="color: #960f0f">Big job creation potential in apparel and leather sectors Growth of credit flow to the manufacturing sector was at a low of 2.5 percent in 2015-16.  Without an increase in manufacturing growth, the job creation that India needs will be stalled and there will be widespread discontent. Credit demand will remain muted in the near term because it takes time for remonetisation effects to materialize and retail activity to pick up.  The capital goods sector specially needs to grow fast which can be boosted only by stepping up private investment which is not coming forward. Much of the ‘wait and watch’ scenario present is due to the presence of excess and unutilized capacity in industry. Private sector needs credit for its growth but unfortunately the PSBs (Public Sector Banks) are burdened with huge NPAs. To nurse back these banks to health is a difficult task and the allocated amount of Rs 10,000 crore in Budget 2017 is not sufficient to recapitalise them in the next one year.  PSBs have been asked to use UDAY (Ujwal DISCOM Assurance Yojana) to reduce their loan loss provisioning and this will unlock Rs 200 billion of capital. UDAY will allow States to take over 75 per cent of the debt of power distribution companies by issuing bonds which are subscribed by banks, mutual funds and insurance companies. Some of the loans disbursed by PSBs during December 2015 to September 2016 through UDAY were classified as NPAs.  PSU banks had already made provisions of 15 percent under UDAY but from now on, they will not be required to make any provision against bonds issued under the scheme. It would free up capital which was lost due to RBI’s provisioning norms regarding bad loans.  Even so, the immediate impact on fresh lending may not be great. The public sector investment, apart from infrastructure spending, is also not a huge amount. Similarly private sector investment has not been given an impetus in the Budget because tax relief which was expected did not come through. On the whole, the RBI’s decision to keep rates unchanged has not been welcomed by industry. The counter argument that a rate cut could have fanned inflation, especially cost push inflation, due to rise in wages has been raised. The demand boost is also likely come from good monsoons and the rewards of the Seventh Pay Commission taking effect. Inflation and slower economic growth is a bad combination leading to job losses. Yet it will be a long time before actual consumer demand picks up substantially because consumer confidence has been shaken and many will postpone spending in favour of saving. Thus the dilemma is whether the RBI ought to have boosted investment through a rate cut to ameliorate the effects of demonetisation or should it have tried so hard to control inflation? According to the RBI governor, the RBI’s decision was based on controlling inflation and thereby promoting growth.

• Indian Economy
• America
• Bhutan
• The Pacific
• East and Southeast Asia
• East Asia
• GDP
• GROWTH
• inflation

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