Kudos to the Reserve Bank of India Governor D. Subbarao for keeping the key rates unchanged in its second quarter monetary policy despite pressure from the Government and the market.

The Governor’s concern about persistent inflation and inflationary expectations compelled him not to resort to a rate cut, which the Government had wanted.

Though the Finance Minister P. Chidambaram came out with a blueprint to bring down the fiscal deficit from the present 5.8 per cent to 3 per cent by 2016-17, the RBI perhaps was not fully convinced whether it can be achieved, going by past trends and uncertainties on various counts.

High deficits

The fiscal and current account deficits continue to remain high, and the measures for reducing the fiscal deficit by increasing fuel prices and attracting FDI will take time to fructify. And these may not be sufficient to enhance the revenues of the Government and attract investments.

Further, the measures are also not adequate enough to boost growth, particularly industrial, which is dependent on several other factors, such as availability of land, power, ease of doing business, dependable taxation and labour policies, and so on.

Economic growth has been hit due to several other factors, such as high and persistent inflation, prevalence of corruption, black money, political uncertainties, lack of administrative measures and delays in decision-making by bureaucrats. The RBI’s approach has apparently irked the Finance Minister and his immediate reaction was expressing disappointment by saying that “if the Government has to walk alone to face the challenge of growth then we will walk alone.”

This sounds as if RBI is against growth and not supportive of Government’s initiatives in this regard.

The objectives of the monetary policy have always been and continue to be economic growth and price stability, and the Finance Minister cannot forget the fact that RBI has been doing its best to enhance credit to the agriculture, manufacturing and retail segments.

The Cash Reserve Ratio (CRR) has been eased to enable banks have more funds at a lower cost so that they can lend at cheaper rates. The current interest rates are not too high, but industrialists are clamouring for more reduction.

The cost of inputs, in general, has increased manifold due to the overall rise in prices and this is what the RBI is concerned about.

That inflation has not only affected the masses but also investors and producers of goods/services is a fact which the Government needs to ponder and address.

Bring inflation under control, then the confidence in the economy will improve bringing along with it the much-needed investment and growth is perhaps the message the RBI Governor has intended through this review.

Different path

Unfortunately, the RBI and the Government have been, intentionally or unintentionally, moving in different directions, though the goal is the same — economic growth with stability.

Savings have dwindled, the investment priorities have changed (from production to speculation) and everybody wants to make quick money exploiting the situation. Ethics and a value-based approach to investment and production seem to be fast disappearing.

The political climate and lack of confidence in the economy are keeping away prospective investors. Governance, which is the foundation for any economy to ensure sustainable growth and equitable distribution of wealth, needs to be strengthened. There needs to be total coordination between the Government and the Reserve Bank.

The remarks of a senior banker that higher provisioning will dent banks’ profit is uncalled for taking into account the huge accumulation of bad debts in banks’ books.

Indiscipline among the borrowers has been basically due to banks extending undue favours to ineligible borrowers and their failure in sanctioning loans without adhering to sound principles of lending.

Some of the bad debts may be due to the slowdown of the economy but the tendency of bankers to expand credit ignoring sound principles of lending needs to be curbed.

The regulator cannot be expected to be a silent spectator to the deteriorating quality of banks’ assets. The loss on account of staggering NPAs is being subsidised by all stakeholders, which include the Government, the taxpayers, the depositors and owners. And this cannot go on.

The banking system that is sound and stable needs to come to the rescue of the economy by respecting the regulatory requirements and, at the same time, playing its role in a professional manner without yielding to the temptation of making easy profits.

High margins

The net interest margin of banks in India remains high compared to international standards and they should, therefore, be in a position to bring down lending rates through efficient management of their assets and liabilities.

As the RBI Governor rightly put it, only in a regime of low and stable inflation can consumers and investors make informed decision.

Growth is a function of good investment for which the environment should be conducive and this calls for appropriate steps from the Government.

(The author is a Mumbai-based consultant. The views are personal.)

Related Topics