#dnaEdit: Economy blues

Reserve Bank of India governor Raghuram Rajan — on Tuesday — yet again refused to respond to the clamour for a rate-cut. However, his sober and detailed response is unlikely to cut any ice with government, industry, business, and retailer banks. All these stakeholders pushed for a rate-cut on the basis that interest rate reduction will boost economic activity through brisker credit off-take. Rajan has argued there is enough liquidity in the system for the retail bankers to ease lending rates. The retail bankers have retorted that continued high deposit rates are preventing any slashing of lending rates. The bankers admit that deposit rates are moderating, and there is a possibility of reduction in lending rates in the next quarter of this financial year. But it must be stressed in this context that credit off-take in itself is not a catalyst to growth or economic activity.

The big picture as presented by Rajan in his assessment is complicated. The US and the European Union (EU) appear to be on a modest recovery path, and Japan, too, is recuperating after its prolonged deflationary lows. The really worrying point is the slowdown in the Chinese growth rate, which could have ripple effects in the south-east Asian region as well as in the emerging market economies (EMEs) like India. 

On the domestic front, sluggish demand for consumer durables is stalling economic activity in the manufacturing sector. Though, due to erratic monsoon, food production in the rabi season is going to be low, but the losses — by and large — have been contained. Exports are stagnating due to both lower global demand and appreciation of the rupee. Foreign institutional investors have been pouring in funds and India’s foreign exchange reserves are now at a comfortably high level of US$343 billion. This would serve as a cushion for India when the US revises its interest rate later in the year, and global fund flows move back to America. 

However, despite this somewhat optimistic economic picture, increased investment is not spurring job-generating economic activity. If there are no new jobs and incomes do not rise, consumer spending in the country will hover at lower levels. The BJP government of Prime Minister Narendra Modi is quite anxious to break the stagnation in growth. But, there does not seem to be any sign of a robust revival. Rajan is looking ahead at 2016 and 2017 for better growth prospects. 

As of now, domestic investors and entrepreneurs are holding back, and the government has not managed to kick-start infrastructure projects that will create the economic buzz. The silver lining is that the economy is stable and poised to take off, though it will not happen quickly or dramatically. It will be a gradual upward trend. This could be frustrating to the government and to BJP leaders who are impatient to rev up the economy and propel change at a faster pace. It would not be fair to blame political dissension for lack of movement on the economic front — especially on key issues like the contentious amendments to the land acquisition bill. The sluggishness in the economy does not have very much to do with political noise. The government has to patiently wait for the inherent global and domestic contradictions to resolve themselves before the economy gets going.