Real growth: Is RBI groping in the dark?

With the festival season approaching fast, the deep cut in the bank lending rates by the Reserve Bank of India (RBI) is surely a Diwali bonanza. Being the fourth rate cut since January, RBI now has now made a drastic cut in the interest rate which as expected top corporate honchos and the business media believes will boost economic growth. Car loans and the home loan EMI will certainly become cheaper for a minute section of the population. But that’s not the only India that has been coping with stress.

Since January this year, crop after crop failure is bleeding farmers. First, the freak rains in the months of March-April had caused extensive damage to the rabi wheat crop harvest. In the kharif season, with a rain deficit of 15 per cent recorded so far, drought has affected nearly 40 per cent of the cultivable areas. This was followed by whitefly insect attack on cotton in Punjab, Haryana, Rajasthan and Maharashtra. In Punjab alone, 60 per cent of the standing cotton crop has been devoured by whitefly. As if this is not enough, basmati prices have crashed fetching a price lower than even the minimum support price (MSP) of Rs 1,450 per quintal for non-basmati rice.

There is a widespread gloom in the countryside.

While rural India remains completely eclipsed from the widespread euphoria that I witness through media reports, what has been completely missed out by RBI governor Raghuram Rajan is that the unlike the western countries, the path to economic growth passes through rural India. Treading on the same flawed economic path that the western world is now struggling to live with, and knowing how short-sighted it was, I was expecting India’s central bank to chart out a different pathway that in reality leads to inclusive growth.

If lowering interest rates can spur growth, Japan would have done it long ago. For nearly 20 years now, Japan maintains a zero interest rate growth policy. Currently, European countries comprising the Eurozone, Switzerland, Sweden and Denmark follow zero interest rate policies accompanied with quantitative easing, which means printing of extra money that is pumped in the form of government bonds at interest rates as low as 0.2 per cent. The point that needs to be understood is that if zero interest rates have failed to act as a booster dose in those countries, how will a drastic lowering of interest rates help reinvigorate the Indian industry?

This is perhaps the reason that the final communiqué of the G-20 Finance Ministers conclave that ended in Ankara in September first week had warned: “Cheap central bank cash not enough for balanced growth.”

Let’s be clear. A cut in the interest rates is a desperate measure that is adopted by the central banks when all policies have failed to spur demand. If rate cut alone is seen a decisive factor, I don’t see any reason why the earlier three cuts by 25 bps each between January and June this year have failed to make any difference either in industrial and export output or in creating more demand. We can go on bowing to the industry pressure to lower interest rates further by saying that lower rates will revive demand, the fact remains that demand will grow only if the purchasing capacity of the majority population goes up.

At a time when commodity prices have crashed internationally, and when a repeat of 2008-09 economic melt-down stares ahead, the only option for India is to increase domestic demand. This will depend largely on revitalizing agriculture, which continues to be in the throes of a terrible agrarian crisis. With MSP for wheat and rice raised by a paltry 3.26 per cent, and with distress sale evident in all other crops, here was (and still remains) a golden opportunity to spruce farm incomes by providing an economic bailout package of at least Rs 2-lakh crore. In addition, considering that farm indebtedness has grown 22 times in past 10 years, RBI could have spelled out a series of measures to lessen the crippling socio-economic impact.

Instead, RBI simply went on the oft-beaten track. Unsure, it followed a monetary policy that has failed to prop up developing country economies. After all, former RBI governor C Rangarajan had once remarked: “When you are not sure what will happen, it is best to frontload rate cut action.”

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