Calcutta Notebook
MSPVT

Finally The Reserve Bank of India Governor Duvvuri Subbarao yielded to concerted pressures from the Ministry of Finance, Government of India, the Planning Commission and the super rich capitalists and capital market operators by obliging them with lowering the repo rate by 25 basis points, that is, from 8% to 7.75% and at the same time by cutting the CRR from 4.25% to 4%, thus enabling the banking system inject credit worth at least Rs 18000 crore for Indian capitalists and investors in the capital market. This he did when by his own assessment India's GDP growth during 2011-12 fiscal has declined by 1.0%, average inflation of Wholesale Price Index has gone up by 0.5%, current account deficit as percent of GDP has increased by 0.7% and finally fiscal deficit as percent of GDP has increased from 5.3% to 5.7% over the year. All these economic indicators point to lower overall economic growth coupled with more money in circulation causing supply-strain and demand-pull at the same time leading to additional dose of inflation. For the last quarter (Q3) and well into the current quarter, Q4, there has been sustained and gradually increasing pressure on the RBI to reduce both these rates and the RBI seems to have remained stubborn not only because the inflation rate is high but also because the CRR is already much too low.

The fiscal cliff problem of the Obama administration in the USA has made it clear that in that country the usual practice is to clear fiscal deficit fiscally. By "fiscally" is meant measures to raise revenues in excess of public expenditures or to cut down public expenditures well below revenue earnings or both at the same time thus clearing the accumulated deficit. And the Obama administration was obliged to have completed the process by midnight, 31 December, 2012. Since no agreement was possible between the administration and the House Committee before that deadline, a 'grace' period of a quarter was granted to the Obama administration to find appropriate fiscal measures for conclusively solving the problem.

Since the US fiscal cliff problem cast its shadow over the global financial market and since no solution could be arrived at in the US, the global financial market, especially those in Europe and India continue to remain in turmoil in the first case and stagnated in the second. Therefore in the Indian financial market the inflow of funds from Fll and FDI sources has stagnated. If the inflow of foreign funds could have accelerated, the RBI would have ignored India's problem of current account deficit. But India's failure to match export value with import bill every year has made this country's external balance of trade position extremely precarious. Under these circumstances the current account deficit amounting to 4.2% of GDP this year over and above 3.5% of GDP in the previous year (2011-12) is a dead weight, an obstruction in front of the economy. When the external value of a country's currency falls, an opportunity is created for expansion of export market of that country's goods and services. Whereas other countries like China in spite of state interventions in other sectors of the economy can explore and tap such opportunities profitably thus earning foreign exchange for the country, India cannot. It may be because of restrictions lingering, or leakages from earned foreign exchange by various unscrupulous means in order to stash monies in tax havens in secret accounts in foreign banks—an old anti-national practice aided and abetted by the political authorities and the administration, or sheer inefficiency of Indian export houses. Under these circumstances with import bill mounting, India's current account deficit shows no sign of diminishing. By expressing concern about the current account deficit the RBI Governor D Subbarao seems to point out the problem of leakages in India's external trade sector where corrections are needed urgently. If so, it indicates the areas where the government cannot sit idle as before and must act swiftly with determination.

The RBI governor Subbarao warns of risks looming in the horizon saying, "The first risk is food inflation. That can put upward pressure on inflation expectations and there will be pressure on monetary policy to respond." Reducing CRR by 25 basis points, the RBI has enabled the banking system to increase credit multiplier by almost 0.5 from 23.53 approximately to 24 which is quite high. This will definitely add fuel to inflation which is already much too high. With agricultural land gradually shrinking due to indiscriminate conversion of fertile agricultural lands into lands for SEZ, industries, new urban centers, highways and infrastructures compounded with lack or withdrawal of existing facilities in the agricultural sector, aggregate production especially of food and other cash crops in physical terms has stagnated generally and declined in staple food sector. With the release of Rs 18000 crore into the banking sector occasioned by CRR-cut and new deposits expected to enter the banking sector thus augmenting the credit multiplier towards optimum, the pressure of inflation on food items is bound to mount. Price level of food items will shoot up. Employment and output in the industrial sector not rising significantly and the international trade sector remaining a drag on the economy, the ability of the RBI to control credit by the instruments available to it in order further to control inflation becomes limited. And the RBI governor had stressed that point. He made the comment, "There is some space, but it is quite limited. As much as there is some space, it is going to be limited, and we are going to use it with a lot of judgement on both the timing and quantum."

Frontier
Vol. 45, No. 34, Mar 3-9, 2013

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