Business Economics & Services Team (BEST)
Five Fault Lines That Decided Against Rate Cut
Despite the heavy pressure exerted on RBI Governor Rajan through multiple channels, it goes to his credit that he stood the ground and refused to go for a rate cut. BEST has undertaken a quick survey as to what were the reasons for that bold decision, collating opinions from, economists, bankers, policy experts, business men and common man. The results are as follows.
1. Unabated fiscal deficit.
Many thought that the RBI Governor has sounded alarm bell to the government and others about the precarious fiscal deficit, which is threatening to go beyond control. Already, the projected fiscal deficit for the current financial year has crossed 90% of the allowable limit set. The grandiose programs launched by the government such as Swatch Bharat (clean India), Jan Dhan (financial inclusion), cleaning up of rivers and importantly the report of the next pay commission will entail huge expenditure in the coming months further straining the fiscal deficit.
2. Increase in the non-performing assets of the public sector banks is a matter of great concern. There can be two views on the issue. One, further blocking of the credit to the industry can turn more accounts into non-performing since many of them are held up for want of finance at reasonable rate for implementation. The other view is that many of the projects have gone haywire on account of the mismanagement and there is no guarantee that further infusion will help in achieving a U-turn in the trend. Rather, there is no checks and balance in place to prohibit diversion of funds from project funding to speculative purposes or non productive works. The controversy around sanctioning of a loan in principle to one of the controversial corporations, heavily steeped into indebtedness, to the extent of one billion dollar from a PSU bank have invited severe criticism.
3. The price level is still overheated though the statistics doled out hid some of the realities on the ground. Food inflation is ruling very high with an unprecedented fluctuations in the prices. For instance, on a year to year basis, almost all food items have shown an upward spiral in prices. A case in point is cauliflower, the price of which used to be hovering around Rs 8to 10 a kg in this season, is being sold out over Rs 20 in some markets on an average. Daily fluctuations in prices is also significant. Today, the prices of cauliflower scled to Rs 30 in the Safal outlets, which is a state run retail outlet. The prices charged by the vendors will be several percentage more than this. Equally significant is the steep increase in prices of medicines including life saving ones on account of taking them out from the purview of administered price.
4. Despite heavy cuts in the oil prices, foreign exchange segment seems to be in a stand still. Further, gold import rules were relaxed to bring down the prices during the marriage season. But foreign exchange outgo on account of that is more offsetting the likely gain from the cut in oil prices. This shows that there is a huge pend up demand for imports particularly consumer items. Also, with lesser foreign exchange outgo, rupee should have been stabilized against dollar. But that is not happening. Also, the lackluster performance of the export sector, despite the slow recovery of the US economy and standstill of the EU economies is a matter of concern.
5. Though a a government with a clear mandate has been elected to power, the policy framework seems to be seethed in the old mold. The government has completed already six months in office, a reasonable length of time to show some results in all fronts. But at the ground level, many of these policy initiatives have yet to show results.
Five Fault Lines That Decided Against Rate Cut
Despite the heavy pressure exerted on RBI Governor Rajan through multiple channels, it goes to his credit that he stood the ground and refused to go for a rate cut. BEST has undertaken a quick survey as to what were the reasons for that bold decision, collating opinions from, economists, bankers, policy experts, business men and common man. The results are as follows.
1. Unabated fiscal deficit.
Many thought that the RBI Governor has sounded alarm bell to the government and others about the precarious fiscal deficit, which is threatening to go beyond control. Already, the projected fiscal deficit for the current financial year has crossed 90% of the allowable limit set. The grandiose programs launched by the government such as Swatch Bharat (clean India), Jan Dhan (financial inclusion), cleaning up of rivers and importantly the report of the next pay commission will entail huge expenditure in the coming months further straining the fiscal deficit.
2. Increase in the non-performing assets of the public sector banks is a matter of great concern. There can be two views on the issue. One, further blocking of the credit to the industry can turn more accounts into non-performing since many of them are held up for want of finance at reasonable rate for implementation. The other view is that many of the projects have gone haywire on account of the mismanagement and there is no guarantee that further infusion will help in achieving a U-turn in the trend. Rather, there is no checks and balance in place to prohibit diversion of funds from project funding to speculative purposes or non productive works. The controversy around sanctioning of a loan in principle to one of the controversial corporations, heavily steeped into indebtedness, to the extent of one billion dollar from a PSU bank have invited severe criticism.
3. The price level is still overheated though the statistics doled out hid some of the realities on the ground. Food inflation is ruling very high with an unprecedented fluctuations in the prices. For instance, on a year to year basis, almost all food items have shown an upward spiral in prices. A case in point is cauliflower, the price of which used to be hovering around Rs 8to 10 a kg in this season, is being sold out over Rs 20 in some markets on an average. Daily fluctuations in prices is also significant. Today, the prices of cauliflower scled to Rs 30 in the Safal outlets, which is a state run retail outlet. The prices charged by the vendors will be several percentage more than this. Equally significant is the steep increase in prices of medicines including life saving ones on account of taking them out from the purview of administered price.
4. Despite heavy cuts in the oil prices, foreign exchange segment seems to be in a stand still. Further, gold import rules were relaxed to bring down the prices during the marriage season. But foreign exchange outgo on account of that is more offsetting the likely gain from the cut in oil prices. This shows that there is a huge pend up demand for imports particularly consumer items. Also, with lesser foreign exchange outgo, rupee should have been stabilized against dollar. But that is not happening. Also, the lackluster performance of the export sector, despite the slow recovery of the US economy and standstill of the EU economies is a matter of concern.
5. Though a a government with a clear mandate has been elected to power, the policy framework seems to be seethed in the old mold. The government has completed already six months in office, a reasonable length of time to show some results in all fronts. But at the ground level, many of these policy initiatives have yet to show results.
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