Government must do its bit to revive the economy’s animal sp

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By not cutting interest rates, RBI is said to have disappointed the finance ministry. Growth is as much of a challenge as inflation, the finance minister says. He’s right, in view of RBI’s own revised growth forecast for this fiscal year at 5.8% from 6.5% earlier. However, inflation hit 7.8% in September, and could even touch 8% in the near term. So, policymakers face the classic growth-versus-inflation conundrum. In this situation, monetary policy alone can’t revive animal spirits. The government must do its bit.
To be fair, the government has announced a slew of reforms. It has also produced a fiscal consolidation plan aiming to restrict the fiscal deficit to 5.3% of GDP this financial year and 3% by 2016-17. But UPA-II beat off policy inertia so late that the central bank can’t be asked to hastily respond to its belated signal at the cost of firefighting on other fronts. It’s sad but true that growth looks a statistic to most people when persisting high prices hit where it hurts most. Untamed inflation also has a growth-dampening impact, in the form of steep input costs for industry.
Several factors generate inflationary expectations in RBI’s view, including a drop in kharif harvests, rupee depreciation and power and diesel price increases. Let’s add to this the fact that reforms need time to show results. That’s provided the government first implements them on the ground. There can’t but be uncertainty on this score, especially in election season. True, announced initiatives like retail FDI will help plug supply side gaps that stoke inflation. Renewed talk of fiscal responsibility is also good. Big government borrowings put upward pressure on prices and affect growth by squeezing credit availability. But whether UPA-II welcomes supermarket chains or slashes subsidies, the going won’t be easy given populist resistance and political compulsions. What guarantee is there it won’t go slow on, if not roll back, reforms?
Having reduced its lending rate in April, RBI has yet again trimmed the cash reserve ratio – the portion of deposits banks must park with it – to boost banks’ lending capacity. It’s also signalled monetary policy could soften soon. Let the government now offer more than statements of intent on pushing growth and fighting inflation. It deserves praise, for instance, for piloting cash transfers to deliver subsidy. But much more is required to rectify the economy’s glaring structural weaknesses and revive investor sentiments. If it really wants to reinvigorate the economy, a fiscally prudent UPA will start executing the reforms it promises, regardless of the road bumps ahead.