The 5% GDP problem: RBI can't solve it, ball in Chidu's court

The GDP number for FY13, which came in on 31 May at 5 percent, the lowest in ten years, should actually not come as a surprise to those tracking the economy. In fact, it was largely in line with expectations, as was the 4.8 percent figure for the January-March 2013 quarter.

For quite some time now, the finance ministry and indeed the Reserve Bank of India have been grappling with the problems of falling growth, low investment and a the threat of price rise which, despite having receded of late, actually refuses to go away. To that extent, the 5 percent growth rate figure is yet another reminder that the Indian economy urgently needs a booster dose.

In fact, it is also significant that the GDP print comes a day after the RBI governor, Duvvuri Subbarao, made it plain during a speech at Ahmedabad that he continued to be worried over upside risks on the inflation front and the rather unmanageable current account deficit (CAD), which hit a scary 6.7 percent for the December quarter.

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Subbarao, who did play ball with the government over the past few monetary policy reviews by cutting the benchmark repo rate thrice since the beginning of 2013, seems to be saying that given the looming risks to the economy, RBI has done whatever it could, but could not be expected to continue its monetary easing policy if risks mounted.

And Subbarao is dead right. While Finance Minister Palaniappan Chidambaram has been seeking to set things right on the fisc, things have hardly gone according to plan. As Subbarao said in his speech, investments still have to pick up, the balance of payments is under severe stress and inflation remains a risk on the horizon. So, all is far from well. And, despite the moderation in global crude and commodity prices, there is the clear and present danger of the tide turning adverse once again.

Says a recent Kotak Mahindra Bank report: “We expect the drop in global crude oil prices and gold prices is likely to be beneficial for the trade gap but only to a limited extent. CAD/GDP could correct to 3.7-4.4 percent, depending on oil-price assumptions. However, structural factors, such as tapering off of private-transfer receipts, lower services exports and high leakage due to interest income, will keep the CAD/GDP at a level higher than the RBI’s comfort zone.”

While inflation dynamics is on a softening bias, the best-case scenario for inflation appears to be in September, when it is estimated to fall to as low as 4.21 percent, the report says. “Beyond this, with base effects out of the way, we expect inflation to crawl back to beyond 5 percent. Our inflation estimates do not, however, factor in changes in coal and electricity prices and hence can produce some upward surprises. The recent rupee depreciation pressures would need to be contended with and may prevent a sharp drop in core WPI inflation,” the bank warns.

In the context of continuing risks and the ballooning CAD, it is important to revisit what Governor Subbarao said while unveiling his monetary policy for FY14 on 3 May: “It is important to note that recent monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation.”

With elections looming on the horizon and the government grappling with issues outside of the economic agenda, governance continues to be a serious concern. And when that happens, a return to a robust growth trajectory, at least for the moment, will continue to be a rather distant dream. The 5 percent problem needs a solution, but from New Delhi. Not from the corridors of the RBI headquarters on Mint Road in Mumbai.