There are three key takeaways from the RBI governor Raghuram Rajan’s second monetary policy.
First, it is on expected lines. Second, it appears as though Rajan is sacrificing growth for controlling inflation. Third, Rajan has become more realistic in bringing down the growth target, but he is still not being honest.
Given where we are, he must know that 5% growth cannot be achieved. The growth in the first quarter was 4.2% and the second quarter is going to be worse. If you get an average of 4% for the first half, then to get 5% in the whole year, one needs a minimum of 6%.
The likelihood of this kind of figures in the remaining half of the current fiscal will be difficult as the extended monsoon has spoiled the agricultural chances. Rice crop and the lentil crop in eastern states such as West Bengal, Orissa and Bihar have been destroyed.
I used to assume 6% agricultural growth this year. I’m afraid it won’t be more than 4.5%. Also, we will be very lucky to have a GDP growth of 4.5% this fiscal.
The RBI governor has brought it down from 5.5% to 5% and in doing so, he is eating his own words. Just about a month ago, when he took over as the RBI governor, Rajan had said he had no reason to disbelieve his colleagues in the finance ministry and that the growth will be 5.5%.
So, what has changed in the last one month, or what has he come to know that he lowered his growth expectation? And if he has, why did he not bring it down to the realistic level of 4.5%?
It is true that the RBI has only one instrument, monetary policy.
What they are doing now is adopting a strategy of hiking the interest rates until inflation, which the RBI thinks only as a monetary phenomenon, comes down.
So the people will ask us, what else can an RBI governor do apart from this? The fact is that a good governor of RBI should be able to influence the ministry of finance to take some necessary steps and announce them along with his own inflation policy.
The RBI governor has to use his coalition building skill to get the right policy mix, so that one singly policy instrument is not used and it is used along with others, to get the economy out of the tailspin.
Otherwise, if you keep increasing the interest rates, inflation will not go down and one will keep pushing the economy down.
(As told to Ashutosh Kumar)
Senior Fellow Centre for Policy Research, New Delhi