There was almost a palpable sound of relief when GDP figures for the July-September quarter were lower than that in the previous quarter, due to low industrial growth, lack of investment and demand. It spurred hopes of the Reserve Bank cutting interest rates on December 2 as it announces its credit policy. These hopes were backed further by crude prices falling to a four-year low (which means lower inflation) and the markets applauded, with the Bombay Stock Exchange registering a market cap of Rs 100 trillion.
Questions have, however, been raised even within some sections of India Inc on whether a rate cut is the answer to falling growth rates, as the factors behind the recent slowdown in growth and investment in India have little to do with high interest rates. The Crisil rating agency, in a well-documented report, said cutting interest rates was no answer to falling growth rates, as it had more to do with the business environment, or expected returns on investments, overleveraged companies and high inventories.
The government has started to tackle this: the department of industrial policy and promotion has identified 46 action points, sectors and specific reforms that are needed immediately to improve India’s ranking in the ease of doing business index. The government should immediately offer a timeframe on its implementation, else it will remain just good intentions.
Given the widespread clamour for a rate cut, even by finance minister Arun Jaitley, the RBI should perhaps cut rates significantly and see if Mr Jaitley and India Inc reciprocate, and do their job of increasing production and growth. It is a pity that our suggestion that both Mr Jaitley and India Inc on one side, and the RBI on the other, should disclose how each would contribute to growth, was not taken. It would have resolved the issue of “why to cut or not to cut interest rates”.
The government should also take advantage of the huge drop in oil subsidies, with crude prices falling by over $30 a barrel, to rein in its fiscal deficit. The scrapping of the 80:20 rule that was imposed to curb gold imports should also curb smuggling and add to the government’s revenue collection. All these good numbers aren’t enough: the government must find ways to boost investment in infrastructure and manufacturing, given that firms are overleveraged and unable to access credit. Corruption at lower levels of the government remains a debilitating factor to growth. The economic situation appears hugely intimidating, but the government can meanwhile build on growth in services — trade, hotels, transport, communications — which as Crisil says has the capacity to create millions of jobs for young people entering the job market every year.
