It takes two to tango, but it increasingly looks like Finance Minister Pranab Mukherjee wants to go solo. For a few minutes on Tuesday, it appeared that Pranab-da was wearing two hats – his own ministerial topi and that of RBI Governor as well. A full half-hour before Duvvuri Subbarao announced the RBI’s ‘surprise’ repo rate cut, Mukherjee virtually gave the game away by hinting at a CII event that the central bank’s interest rate policy was about to be reversed.
Perhaps Pranab-da was just playing to the corporate gallery, perhaps he was only stating what he thought was blindingly obvious; yet, just the sight of the Minister speaking so openly on monetary policy making is intensely disquieting to anyone who values the autonomy of the RBI. The indiscretion does little justice to his long years in government, particularly because it capped an extraordinary few weeks when the government was seen to be overly muscular in persuading the RBI of its case for lower rates.
In any case, the deed is done, and Subbarao delivered the ‘surprise’ repo rate cut of 50 basis points. But as a series of analyses on Firstpost noted on Tuesday, he effectively signalled that there won’t be many more such rate cuts to come – unless there was a dramatic improvement in the inflation dynamic (and there’s no earthly reason to believe that might happen).
In effect, the RBI is, for all its frequently articulated concerns about latent inflationary risks, gambling on growth. Having held rates high for long in response to stubborn inflation, and drawn a disproportionate share of the criticism, the central bank has gone out on a limb to fire up the growth engine – and fast – before the RBI is called upon again to put out the fires of inflation.
But the window of opportunity for this policy gamble to work is very small, which is why Pranab-da should get going just as fast. The RBI reckons that WPI inflation will again go back to double-digit levels in September, and the good Governor has indicated that if the situation so warrants, he will stand by to raise rates again.
That doesn’t leave much room, and there’s plenty left for the government to do. Now that the Finance Minister has had his way with the rate cut, it’s time for him to show the same sense of urgency on matters directly under his ambit.
In recent months, the government has tangled itself up in a hopeless policy muddles that have heightened conflicts with critical stakeholders, escalated these to weary litigation processes, and effectively paralysed policymaking. The government’s inability to carry a coalition along on some of the key proposals that have long been screaming for action is compounding the many crises and is choking up investments. Additionally, it has been unable to break the deadlock with State governments over the compensation for revenue losses from the planned phase-out of Central Sales Taxes.
Most critically, the government’s mortal fear of taking any unpopular but necessary steps to lower subsidies has played havoc with its numbers.
Indicatively, oil marketing companies have now served a virtual ultimatum on the government, saying they will unilaterally raise petrol prices by more Rs 8 a litre – unless the government compensates them for the losses they are bearing everyday through excise duty cuts on petrol. Indian Oil Corporation chairman RS Butola said on Tuesday: “We have been very patient, not raising prices since December despite our cost of production spiralling. But there is a limit to which we can borrow money and produce fuel for the country,”
The RBI too very bluntly made the case for a hike in the administered prices of petroleum products. It noted that “persistent demand pressures emerging from inadequate steps to contain subsidies as indicated in the recent Union Budget will further reduce whatever space there is (for monetary policy)… Overall, from the perspective of vulnerabilities emerging from the fiscal and current account deficits, it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production.”
Both Prime Minister Manmohan Singh and Pranab Mukherjee have for long mouthed platitudes about their readiness to “bite the bullet” and take hard policy decisions. So far, we’ve seen little evidence of any such readiness to do the square thing, and after the RBI repo rate cut, the government has run out of alibis for its inaction.
The time to act is now. Any failure to respond with policy initiatives to match the RBI’s gamble will only result in an unseemly unwinding of the policy tango.