This time around, the monetary policy statement had to be about growth rather than inflation. That’s what it turned out to be when RBI Governor Urjit Patel read out the policy document on Wednesday afternoon. Patel and his team in the Monetary Policy Committee (MPC) has effectively held a mirror on economy to Union finance minister Arun Jaitley by sharply cutting the economic growth forecast while upping inflation projection.
The real gross value added (GVA) growth for 2017-18 has been revised down to 6.7 percent from the August 2017 projection of 7.3 percent. The RBI now expects inflation to rise to 4.2-4.6 percent in the second half of this year compared with about 3 percent earlier. RBI left the rates untouched. This means the central bank has almost closed the rate cut window for now unless there is a dramatic reversal in the price trend. “The downward revision in the growth projection is major. Coupled with this, increase in inflation projection means growth-inflation dynamics is worsening,” said DK Joshi, chief economist at rating agency Crisil.
What is more important to see is if the government will now take note of the warning issued by the MPC on the growth front. Patel and team have given a to-do list to the Narendra Modi government to act on certain critical aspects to restore growth momentum. Main among those is recapitalising the public sector banks and getting the lost investment momentum back, two key issues this website has been highlighting for long as the key hurdles for economic growth recovery.
That apart, the policy lists out a few steps for the government to repair the sagging economy: a) close the severe infrastructure gap; b) restarting stalled investment projects, particularly in the public sector; c) enhancing ease of doing business, including by further simplification of the GST; and d) ensuring faster rollout of the affordable housing program with time-bound single-window clearances and rationalisation of excessively high stamp duties by states.
Further, the MPC has noted that even the rollout of the GST too has impacted the growth. “The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates.” The RBI said consumer confidence and overall business assessment of the manufacturing and services sectors surveyed by it weakened in second quarter of 2017-18; on the positive side, firms expect a significant improvement in business sentiment in the third quarter.
It is not too difficult to understand why the MPC has opted for a status quo in rates on Wednesday. Retail inflation has been inching up in the last two months. From 1.46 percent in June, the print rose to 2.36 percent in July and further to 3.36 percent in August. The base effect will likely push the inflation further in the coming months. If one looks at the inflation internals, the villain continues to be food and vegetable prices. CPI food inflation rose to 1.52 percent in August from negative levels in the preceding three months. Vegetable inflation sharply jumped to 6.16 percent in August after staying negative for three consecutive months. Certainly, the MPC would not have been happy looking at these trends and think of a rate cut at this point. It was only logical to expect that the RBI would wait for a few more months before making another move.
One of the RBI deputy governor, Viral Acharya, speaking at a presser post the RBI policy said he expects anywhere between 12 and 18 months for the private investment activity to pick up. So far, the government has been in a denial mode about the slowdown in the broader economy and the notable slowdown in private investments. This is despite the continuous fall in the GDP growth in consecutive quarters (5.7 percent in the June quarter), dip in private investments, rising unemployment and a crisis situation in the banking sector. In fact, the only element that has been supporting growth is government spending.
The bottomline is this: By refusing to offer another rate bonanza and asking the government to work on structural issues to restore the growth momentum, Patel has sent a clear message to Jaitley that the solutions to repair the damage in the economy lies in fiscal reforms, not just in RBI rate cuts alone. It is now up to the government to act, particularly on key issues such as absence of private investments and banking sector recapitalisation.
Updated Date: Oct 04, 2017 16:54 PM