Outgoing Finance Minister Pranab Mukherjee does seem to have a way of dashing hopes. A day before he is to put in his papers and run for President, expectations soared that the FM would lift sentiment by unveiling a series of measures to boost the economy and bring back the growth momentum.
Instead, what came in on Monday after hours of a nail-biting wait was a short, crisp set of measures aimed at propping up the declining rupee. Nothing more. The Reserve Bank of India (RBI), the authority the FM has now made a habit of turning to, announced a mix of measures which, cumulatively, could help bring in $10-15 billion of foreign exchange in a relatively short period, but which would do little to lift the economic sentiment from the rut.
Speaking to CNBC-TV18 immediately after the measures, C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, said these measures were aimed at addressing one part of the problem.
The measures are clearly aimed at stemming the rupee’s slide for the moment, but the broader, structural issues and reforms have been left untouched for now. Not surprisingly, the equity and forex markets, which had been holding up well till the time RBI came out with the announcements, dipped once again as it became clear to the markets that the short press statement from the central bank was all that was to come by way of a package.
Call it heightened expectations or poor communications management on the part of the government, but hopes had built up over the weekend, ever since Pranab Mukherjee told the media that the government would announce some measures on Monday which would improve market conditions. Analysts and marketmen interpreted it to mean the government would come out with a series of measures which would be a mix of steps to curb the slide of the rupee, aid the corporate sector and address the reforms logjam and the ballooning subsidy burden.
Would the FM come out with steps on fuel prices? Would he announce moves on foreign direct investments in the sectors where it is stuck for years? Will there be an overseas bond issue on the lines of the India Millennium Deposit? Will there be steps to cut government spending? Policywatchers and analysts went into a huddle over the weekend speculating what the FM might do.
By Monday afternoon, those expectations had vanished and the same analysts were busy poring over the fine print, even expressing surprise that these measures were all that came. The RBI announced a hike in the external commercial borrowing limit by $10 billion, an increase in the FII limit in government bonds by $5 billion and allowed sovereign wealth funds and some other categories of investors to also invest in government securities. Among other things, the RBI has also rationalised the terms and conditions of lock-in and residual maturity for FII investment in infrastructure debt and non-resident Indian investment in infrastructure debt funds.
As the markets began understanding that this was far from the big bang that they were hoping for, the reactions came in thick and fast. Reuters quoted Jonathan Cavenagh of Westpac, Singapore, as saying that the markets would remain disappointed unless long-term structural issues around capital flows and competition in the retail sector were addressed.
Rupa Rege Nitsure, chief economist of the state-run Bank of Baroda, told Reuters that the rupee wouldn’t recover on a sustainable basis despite these measures unless long-pending structural reforms were addressed. HDFC Bank’s Abheek Barua called the measures ‘tame’ and ‘disappointing.’
This ‘last hurrah’ from Mukherjee looks suspiciously like the veteran politician’s last Budget of 2012: high on expectations and very low on delivery. Not just low, the budget rattled the corporate sector with several measures which were seen as throwbacks to the licence raj. This time too, Pranab-da has done pretty much the same thing.
The important point is, by itself these steps may have been welcomed by a market hungry for anything concrete from a government which has not taken big reformist steps in a long, long time. But coming as it did after a weekend of anticipation boosted by statements from both Mukherjee and the Prime Minister who commented on possible steps to stem the rupee slide, Monday’s moves by the government and RBI are being seen as hugely disappointing, and too little at a time when much more was needed.
After all, as former RBI Governor Bimal Jalan used to repeat rather eloquently, monetary policy is also a lot about managing expectations. The government has sorely failed on that score.