Five Big Questions On The Economy
There’s this all-around schizophrenia about the Indian economy’s fortunes today, best exemplified by a recent interview Aditya Puri, managing director of HDFC Bank, gave to Mint. “We tend to go into depression very fast. Not even two months, two weeks ago it was, O mar gaye (we are dead)! Today, it’s a little more optimistic.” Now who would have thought the credit for this change in mood would go to Reserve Bank of India governor Raghuram Rajan? Indeed, it’s ironical that two weeks ago some were talking about seeking IMF help in a repeat of the 1991 scenario. Now, the same ‘experts’ are reassuring us that the feel-good sentiment is back.
So, is this all about just control over the perception management game, as the UPA seems to have done with Rajan’s help? Has anything changed at all? Or was the economy not in that bad a shape as it was made out to be? All that we know for sure is that the adulation will not last forever. “It would be unfair to put unreasonable expectations on the RBI, as it cannot solve all the problems,” warns Dr Shankar Acharya of ICRIER. “Perhaps 80 per cent of economic policy measures need to be taken by the central and state governments,” he adds.
There’s no denying that Rajan has infused a sense of direction by his clear pronouncement of intent to take action. His communications strategy is different too. This story was written before Rajan’s first mid-quarter review on September 20. It’s unclear whether the RBI will touch interest rates, but the market knows by now (thanks to newspaper reports) that the RBI and finance ministry are working on lending mechanisms to ensure cheaper funding to banks for some types of consumer-friendly loans.
This comes on the back of Rajan’s other decisions—freeing up banks to set up branches; allowing banks to raise 100 per cent of their combined net worth and long-term borrowing from overseas and then swap it with the central bank, leveraging NRIs to ensure better inflow of funds through FCNR accounts etc.
Ardent UPA critic Surjit S. Bhalla of Oxus Research says it’s “sheer luck” that several external and domestic events helped improve investor sentiments. These included the Syrian crisis coming off the boil and global oil prices softening, Indian exports showing double-digit growth in the last two months and gold imports showing a decline. The offshoot was that, in less than a fortnight, the rupee has strengthened from Rs 68.80 to around Rs 63 per dollar at a time when many market speculators were banking on it depreciating to Rs 70 or even Rs 80.
This raises the question: have the fundamentals changed or is it only a perception change? Dr Arvind Virmani, former chief economic advisor and ex-IMF executive director says, “It is due to a change in perceptions of short-term financial investors. There is little or no change in the perception of long-term investors... the decline in GDP growth coupled with marginal improvements in balance of trade have a negative effect.” Virmani, who heads Chintanlive.org, a think-tank, stresses that the RBI governor can only change perceptions regarding aspects that are covered by the central bank’s mandate, which is monetary stability. “Beyond this, the expectations are unwarranted,” says Virmani.
A key area of concern voiced by Rajan is the bad loans problem, with NPAs rising over 50 per cent for 39 listed banks in 2012-13 and credit growth slowing to 14 per cent from 16.8 per cent in 2011-12. The RBI governor has indicated that he’d be willing to take tough decisions that may not necessarily be popular.
Indeed, the mid-quarter policy statement on September 20 may well be a bit of a dampener—if the expected rate cuts do not happen due to inflationary pressure concerns with the August WPI—it’s at a six-month high of 6.1 per cent, mainly due to high vegetable costs. Without better supply-side management, banking on a good monsoon and high farm yield to curb inflation would be wishful thinking. “A rate cut would be a trigger for growth as with Rs 2,00,000 crore of debt in balance, even a one per cent cut would provide Rs 20,000 crore of funds in the economy and indirectly provide stimulus for growth,” says Devan Choksey, CEO of KR Choksey Securities.
Mahesh Vyas, MD and CEO of Centre for Monitoring Indian Economy, feels it would be unrealistic to expect the RBI to resolve many of the bottlenecks holding up investments, particularly new ones. “Even if he goes for a rate cut, it will offer no solutions to ease the bottlenecks in infrastructure development,” Vyas says, adding that while perception improvement may work for investors, the outlook for the corporate world will take more time to improve. Data shows that while corporate borrowings have risen sharply, it has mostly been invested in speculative assets like land and not manufacturing or infrastructure projects.
While the investment climate is not hunky-dory, Dr Rajiv Kumar of Centre for Policy Research is happy that the RBI governor has hit the deck running, with clear decisions showing he is in control of the situation. The good monsoon has also opened a window for growth, particularly rural development. That is a positive note the central bank chief will have to maintain—or else euphoria will hit the ground reality of lags in infrastructure and governance.
Apropos of Step ’n Stride (Sep 30) on new RBI governor Raghuram Rajan’s effect on the market, with so much ado about his seemingly messianic act of revising the repo rate, it has to be said that we tend to nourish a personality cult. It's not that anyone doubts Rajan’s genuine concern about the fall of the rupee, but his economic focus reminds one of the adage, ‘old wine in new bottle’. Rajan steps into the shoes of a predecessor known for shifting the economic burden onto the shoulders of the common man, instead of levying adequate taxes on big corporate houses. Rajan must tackle this basic problem.
C. Chandrasekaran, Madurai
Charisma counts, but the 25 basis points increase shows the governor means business. He understands how much damage inflation has caused, both to household budgets and the inventory of financial assets. Savings have been flowing into hedges like gold, straining the CAD, or into real estate, thus further inflating a bubble. Instead of yielding to short-term pressures for a rate cut, the effort now seems to be a virtuous cycle of moderate inflation setting the stage for sustainable growth.
Ashok Lal, Mumbai
It has been reported that the Rajan effect on the rupee will continue. Indeed, to boost foreign fund inflows and help banks get funds at cheaper rates, Rajan announced a special window to swap foreign currency for non-resident accounts here. That helped the rupee recover some of its lost value. The Rajan effect will continue if he takes further action to boost credit flow while keeping inflationary pressures in check.
Beena Mathur, Pune
Charisma counts, but the 25 basis points increase shows the Governor means business. He understands how much damage inflation has caused, both to household budgets and the inventory of financial assets as well as to economic growth. Savings have been flowing into hedges like gold, straining the CAD, or real estate, inflating a bubble. Instead of yielding to short term pressures for a rate cut - the earlier ones, done against the RBI's better judgment, have sunk without a trace - the effort now seems to be start a virtuous cycle of moderate inflation setting the stage for sustainable growth. The government will have to do its bit, holding down the fiscal deficit and easing supply side constraints through reform, especially in agriculture. Dr. Rajan is one of the most inspired personnel choices in a long time.
Another Integrity choice.
Forget efficiency. I would be surprised if Raghuram did not accept monetary gratification.
With much ado about the messaianic prescription evidenced through Rajan's revision in repo rate, we tend to nourish the personality cult. While none doubts the genuine concern of the new Governor over the fall in rupee value, his economic focus reminds one of the adage, "old wine in the new bottle". Rajan steps into the shoes of his predecessor, known for shifting the economic burden on to the shoulders of commoners, in lieu of tapping sources from the resourceful corporates through levying adequate taxes. The roots of NPA lie with big business houses. The Black money stashed in off shore banks is still beyond the reach of the economists.Ironically, the rulers insulate the defaulters invoking the concept of banking privacy for reasons unknown. They fail to take leaf from our neighbourers like Pakistan, Bangaladesh where the details of NPA are kept in public domain. Tax evasion is the order of the day. With the scams surfacing one after the other, the nexus between the political leaders, business houses, and the bureaucrates was widely debated. We are yet to nail the dirt in absence of tangible remedy.
Govt should crack its whip on the hoarders and middlemen.
If need be start importing vegetables.
It has been some serious spade work from RBI which has given Rupee its current status. There was a panic created which seeped in fear of loosing in everyone. However RBI has got things together.
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