Rate cuts won't revive India's stalled growth: Andy Mukherjee
India's latest interest rate cut won't revive growth. The central bank's quarter-percentage point reduction in the policy rate, to 7.75 percent, is just as futile as the last one almost a year ago.
GDP will pick up when New Delhi curbs its own profligacy and improves the investment climate. The February budget may be the current government's last chance to do both.
If companies aren't investing, it isn't because monetary policy is too tight. With 10.6 percent consumer-price inflation, the base rate for borrowing in 10-year bonds was already negative in real terms before this last rate adjustment. Rather, the government's quest to fund itself is crowding out the private sector. Banks are forced to buy up government bonds, meaning two-thirds of what households save in a year is reinvested in public debt.
Bottlenecks choking growth are also in need of attention. A debilitating coal shortage is hurting electricity production.
Meanwhile, road builders are wriggling out of contracts with the highway authority on the pretext that the environmental clearances promised to them are taking too long to materialize. Such factors help explain why GDP growth for the financial year is expected to slow to a ten-year low of 5.5 percent.
Deep interest-rate cuts are currently impossible because of inflation. Rural wages are rising at an annual 18 percent pace.
If more money isn't matched with greater investment and output, the result would merely be a further boost to imports, widening India's 5.4 percent current account deficit. For now foreign investors are helping to
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