'Misplaced analysis': Jaitley's barb is targeted at Rajan's economy assessment

Finance Minister Arun Jaitley yesterday (4 June)  tried to generate optimism by suggesting that fears of a bad monsoon and reversal in the declining trajectory of inflation are exaggerated and sought to reassure that the economy was indeed experiencing a growth revival. Interestingly, the finance minister said there was a lot of “misplaced analysis” coming out over the past two days, suggesting new dangers to the economy on account of a bad monsoon and associated risks such as rising inflation and tepid growth. It is quite clear the finance minister’s reference to “misplaced analysis over the past two days” was pointing to the RBI’s monetary policy statement on 2 June which talked about the possible risk of rising inflation and lower growth if the negative consequences of a bad monsoon were not handled well. RBI Governor Raghuram Rajan gave a cautious guidance for 2015-16 suggesting that the consumer price inflation could be 6% by January 2016. That indicates a reversal of the currently declining trend. Rajan’s statement came after the finance ministry’s Chief Economic Advisor, Arvind Subramanian, publicly stated , on the eve of the RBI credit policy announcement, that inflation was fully under control and is trending downward. The consumer price inflation for April was down to 4.9%, down from 5.3% in March 2015. The food component of the consumer price inflation also came down by nearly 1% to 5.3% in April. So the finance ministry’s optimism was probably based on this declining trend in consumer prices. However, Rajan was being cautious and took a conservative approach to project 6% consumer price inflation rate by January. More importantly, he also marginally scaled down the RBI’s own GDP growth projection to 7.6% for 2015-16. Contrary to this, the finance minister continues to hold on to his budget projection of 8 to 8.5% GDP growth for this fiscal. So there seems to be a clear divergence in the projections by the finance ministry and the RBI. The bank is far more cautious and has talked about various risks still embedded in the economy which could result in higher inflation and lukewarm growth. [caption id=“attachment_2264520” align=“alignleft” width=“380”] Reuters[/caption] While Rajan argued a bad monsoon and the subsequent food distribution management by the government were a risk factor, Arun Jaitley played this down by saying the monsoon distribution, as per estimates, were not so negative. The finance minister said the rain shortfall is likely to be concentrated more in the North and western regions which have better ground-water-driven irrigation infrastructure and can tide over the crisis. When asked whether he was being too pessimistic, the RBI governor said the central bank was not meant to act as a cheerleader for the economy. “There are others who can play that role”, he added. The larger point is the RBI has chosen to call a spade a spade and the market somehow believes the Central Bank analysis, even if Jaitley may describe it as somewhat “misplaced”. No wonder, the stock market went down over 900 points after the credit policy statement. That was also accompanied by the Met Department suggesting that the country might receive no more than 88% of the long-term average rainfall. Rajan raised another important issue in a rhetorical tone which seemed to question the very premise of the government’s high GDP growth projection. Rajan said why should anyone be desperate for a big interest rate cut if the economy is growing at closer to 8%? This question is very crucial because it exposes the contradictory stance of the government policymakers who are asking for sharp cuts in interest rate to revive the economy while insisting the economy is growing at above 7.5%. This problem, of course, has been caused by the new GDP methodology which raises the growth rate for 2013-14 and 2014-15 to average 7% plus. Of course, no one believes these numbers because on the ground these two years are associated with a near collapse of the economy with almost every indicator – industrial production, agriculture, tax collection, bank credit, exports and corporate profits – declining substantially. If truth be told, 7% is the new 5% for GDP growth. So if the CSO says 2013-14 and 2014-15 saw GDP growth of 6.9% and 7.3% respectively, it can be safely assumed the real growth was 4.9% and 5.3%, as experienced on the ground by the consumers and producers. This is what compels Raghuram Rajan to suggest that, “growth is weaker than what the headline numbers suggest”. The finance minister has every right to talk up the economy but he must keep his ear to the ground. The big challenge in the coming months is how to revive growth in rural consumption and demand which are possibly at a decade’s low. Rural wages grew 18 to 20% for about 4 years until early 2013. And this is down to possibly less than 3 % now. The stock price of all rural demand-sensitive companies are falling. Normally, these companies prove quite resilient in a falling stock market. Not anymore. The NDA government wants to kickstart rural spending programme to generate higher demand. It is also considering giving higher support price for farmers so that their distress is mitigated somewhat. The RBI, on the other hand, has warned that higher support prices could prove inflationary. This would be a critical political-economy question facing the PM and FM. Indeed, if rural demand is very depressed, some increase in support prices for agri products is not going to reignite inflationary fires so easily. Inflation is also matter of psychology and expectation. In such a depressed demand condition, it is difficult for inflationary expectations to regenerate. Of course, the NDA will have to meet the fundamental promise made in the budget – of scaling up public sector investment. At present there aren’t enough signs of investment scale up of the order announced in the budget. The jury is still out on the outcome of this strategy. After one year in power, Modi and his men may claim big achievements through public rallies. After two years, more concrete evidence will need to be produced.