In defence of Rajan

Somehow, the message that the primary role of RBI is to control inflation does not seem to go down well with our members of Parliament

It has been a matter of some reporting and wide speculation that Reserve Bank of India governor Raghuram Rajan is under pressure from members of Parliament across party lines to cut interest rates. Even Finance Minister Arun Jaitley has said that he would like to see lower interest rates, but that he has left the final decision in the hands of the governor.

On Thursday Rajan is reported to have said that he was not rattled by calls for rate cuts. "Interest rate cut by itself would not lift the economy. It is not the only thing which is holding back economic growth. But it would have some impact," Rajan said after the RBI's board meeting in Kolkata.

General perception is that the economy will immediately start moving higher after the central bank cuts interest rates. Nothing can be further from the truth. In reality, interest rates for companies with high rating are already low. They can raise low cost capital from global markets, thanks to a relaxation by the RBI some time back. We have yet to see growth from these companies. Also, rates in the money market and bond yields are already lower, but there are no signs of a pickup in activity.

Commenting on the recent policy announcement by the central bank, Rupa Rege Nitsure, Chief Economist, Bank of Baroda said, “Policy rates remain at elevated levels and are aimed at controlling aggressive credit disbursals, so as to keep inflation in check.”

In a recently conducted survey by Business Standard it was found out industry leaders were no longer as bullish on Narendra Modi’s government as they were at the start of his tenure. Nearly 40%  of those surveyed felt that the Modi government's biggest weakness in the last six months was its slow pace of economic reforms.

There has been precious little apart from lip service from the government. Clarifying on the poor progress made by the economy Prime Minister Narendra Modi, while addressing a group of 16 US based economist said that his government's first six months in office was a period in which a sickly economy was nursed back to health. He said that the real "exercise" would start now.

Industrialists surveyed by Business Standard found out that the best idea from this government is ‘Make in India’. But then this is still an idea. There are no support systems in place yet to implement the idea. Important and bold decisions to revive the economy are missing, either because the government does not have the courage to do it, given ongoing and impending state elections which are preventing them from announcing harsh measures, or it does not have the numbers in the Parliament to push the bills through.

To be fair to the government, policies to indigenise the defence sector is creditable, but that is just one sector. Further, the actual benefit will take years as the products have to go through a long period of development and approval.

Activity in other sectors is clearly missing. Entrepreneurs are not willing to bet their capital, so there is still a clear trust deficit. In a recent meeting that the cabinet secretary held industry leaders along with other secretaries, two important suggestions were made. One, it is not enough for the Centre to relax laws to facilitate quick investment. The states, too, need to be taken on board in this drive to facilitate investments. Two, the government must develop a relationship of trust with industry, so that the latter does not have an adversarial relationship with the former.

These are factors that have nothing to do with interest rates. The ball is clearly in the government’s court, if it is blaming the RBI interest rate policy for lack of growth, it is not only an excuse but it reflects poorly on the government’s inability to recognise the problem.