Read governor Raghuram Rajan: Time to worry

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June 7, 2015 12:17 AM

On 26 May 2015, our mind space was occupied by celebrations on the part of the government and criticism on the part of the Opposition.

On 26 May 2015, our mind space was occupied by celebrations on the part of the government and criticism on the part of the Opposition. Both were justified. Each one was playing its designated role in a parliamentary democracy. The people of India deserve to hear both sides—even if the faithful don’t wish to.

On the last working day of May, the economic data for 2014-15 was out. Growth was up, marginally, from 6.9% in the previous year to 7.3%, with the caution that the growth rate may be revised downwards. There were no surprises in the numbers. The only surprise is that the government still refuses to acknowledge that the economy had stabilised in 2013-14 and cussedly maintains that it inherited a broken economy. Fact is, it did not. Fact also is that nation-building is always unfinished work.

As editors and columnists worked overtime to write their pieces, the RBI worked silently and gave its report card three days later. Let me reproduce the exact words of the Monetary Policy Statement:

“Reflecting the balance of risks and the downward revision to GVA estimates for 2014-15, the projection for output growth for 2015-16 has been marked down from 7.8 per cent in April to 7.6 per cent with a downward bias to reflect the uncertainties surrounding these various risks.”

Splattered with red ink

The statement is splattered with red ink. Just consider these words about the agricultural sector: “Agricultural activity was adversely affected by unseasonal rains and hailstorms in north India during March 2015, impinging on an estimated 9 lakh hectares of area sown under the rabi crop. Reflecting this, the third advance estimates of the Ministry of Agriculture indicate a contraction in foodgrains production by more than 5 per cent in relation to the preceding year’s level. Successive estimates have been pointing to a worsening of the situation, with the damage to crops like pulses and oilseeds—where buffer stocks are not available in the central pool—posing an upside risk to food inflation. For the kharif season, the outlook is clouded by the first estimates of the India Meteorological Department (IMD), predicting that the southwest monsoon will be 7 per cent below the long period average. This has been exacerbated by the confirmation of the onset of El Nino by the Australian Bureau of Meteorology.” The IMD has since forecast a deficiency of 12%.

Government is in denial about rural and farmers’ distress. When the government thinks and speaks of farmers it is about what a great law it has made to take away the land of the farmers! Mr Nitin Gadkari is reported to have said “land acquisition is a blessing in disguise for farmers”.

From all parts of the country we hear reports of mounting debt among farmers, denial of fresh crop loans because of unpaid dues, hike in interest rate on farm loans to 7%, and rise in prices of fertilisers. The unkindest cut is the paltry increase in minimum support prices (MSP)—R50 for paddy, wheat and cotton, R10 for sugarcane and R nil for soyabean, bajra, maize and groundnut. Meanwhile, in the wholesale markets, prices of commodities such as wheat, paddy, sugar, cotton and rubber have declined, dealing a further blow to the producers.

Where is silver lining?

Is there a silver lining in industry? Read the RBI: “The sustained weakness of consumption spending, especially in rural areas… continues to operate as a drag. Corporate sales have contracted. The disappointing earnings performance could have been worse if not for the decline in input costs. Capacity utilisation has been falling in several industries, indicative of the slack in the economy. While an upturn in capital goods production seems underway, clear evidence of a revival in investment demand will need to build on the tentative indications of unclogging of stalled investment projects, stabilising of private new investment intentions and improving sales of commercial vehicles. In April, output from core industries constituting 38 per cent of the index of industrial production declined across the board, barring coal production.”

Can we turn to services for succour? Read more from the RBI: “Leading indicators of services sector activity are emitting mixed signals… The services PMI declined in April 2015, mainly on account of slowdown in new business orders.” There is more bad news: in May 2015, HSBC’s PMI slipped under the 50 point mark, indicating contraction.

A challenge, not crisis

We can debate, separately, whether RBI has done its part to facilitate growth. My view is closer to the view of the government. However, the reality is that after cutting the repo rate by 25 basis points, RBI has, for the present, absolved itself of any further responsibility and has declared its position: “Monetary easing can only create the enabling conditions for a fuller government policy thrust that hinges around a step up in public investment in several areas that can also crowd in private investment.”

The situation is challenging but not a crisis as we faced in 1991 or 1997 or 2008. The Congress, the United Front and the UPA governments reached outside government to garner ideas and win support. There are solutions, and if the BJP makes the effort it will find that everyone has the welfare of the country at heart.

The messenger has delivered the message. Don’t shoot the messenger!

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