Subbarao blazes a trail

Brilliant. That about sums up RBI Governor Subbarao’s Monetary Policy Statement for 2013-14.

The least bit was the repo rate cut of 0.25 per cent.

It was a reluctant act. Some crumb had to be thrown in Delhi’s direction given the strong overt and covert pressures from various powerful political and bureaucratic quarters for sharp rate reductions. The Governor was careful to emphasise that there is ‘little scope for further monetary easing’, given the several risk factors on the inflation, fiscal and BoP fronts. One suspects he had more than a little behind-the-scenes support from the right Delhi circles.

India is extremely lucky in a most important and critical respect: the professionalism and integrity of the RBI’s Governors and their firmness in the right monetary stance. Given prevailing ethical standards, safeguarding our precious (and borrowed) forex reserves is also a major achievement.

Subbarao’s statement was pretty frank.

It starts with the gem, ‘monetary policy by itself cannot revive growth’, followed by the much-needed and sadly largely missing significance of stepping up public investment and ‘improving governance’.

The better (basically prospective) fiscal situation is not the outcome of slashing revenue expenditure (are government salaries and jobs being restrained? there is already talk of a Pay Commission.) but mindlessly axing investment in essential sectors and services. The jargon and spin around ‘controlling the fiscal deficit’ would be amusing if it were not so serious a matter.

The Indian situation is very different from the US, Europe and Japan, where central banks have ‘zeroised’ interest rates and ‘infinitised’ (for lack of a better word) liquidity but to little effect on growth and jobs. Their cushion is sub-2 per cent inflation, ours is in double digits.

That the Governor is a man of the world is contained in his assurance of supplying adequate liquidity to the financial system.

Even a cursory study of corporate profits shows them running well ahead of interest rates. How, in these circumstances, is the current cost of credit a deterrent to investment?

Another piece of wisdom from the Governor is the link he makes between the fiscal deficit and current account deficit. Self-evident, but we have ‘sages’ proclaiming that the cause is the ‘shortfall’ between investment and saving at a time when investment itself, according to them, is falling. India, unfortunately, is fast turning into an ‘import and consume’ economy.

Clearly, Subbarao has a far better grip and understanding of our economic malaise than his critics.

Hidden in the print is the somewhat worrying statistic of 16 per cent growth in non-food credit and increase in the corporate bond investments of banks (which are no different from credit), despite the slowdown. What are the end uses? Financing business losses or other non-covenanted applications? The extensive corporate debt restructuring, now work in progress, falls into place.

Subbarao’s term is ending later this year. If he is not reappointed, his last hurrah will be remembered for quite some time.

One must hope that his successor trails the same independent path of Subbarao and his several predecessors.

(The author is a Chennai-based financial consultant. Views are personal.)