Cut and thrust
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To say that Finance Minister P. Chidambaram made a combative statement after RBI Governor D. Subbarao refused to cut rates on Tuesday will be to miss the wood for the trees. India's economy is at a stage where the slide in growth is as compelling a concern as inflation. The year is expected to end with a 5.8 per cent rate of growth. The global economy is not showing signs that the Indian economy can take advantage of. Persisting domestic inflation concerns have simply added to these two problems. The missing link in the chain so far was a sign that the Central government was willing to take steps to revive investments in the economy. This was deemed essential as the private sector, daunted by high interest rates and the overhang of bad debts, appears unable to pitch in.
The finance minister will claim that the UPA government is attempting to kick off growth-oriented fiscal policies that will now spur investment. The RBI, too, has acknowledged this effort in its second quarter monetary policy statement issued on Tuesday. The finance minister would contend, therefore, that fiscal policies needed a cut in the interest rate to push growth into a higher orbit — in other words, a demonstration of belief by the RBI in the efficacy of the measures the government has rushed through recently. On the other hand, Governor Subbarao, presumably, would not wish to be seen being nudged into an accommodative monetary policy response in his last year in office, when the signals are still uncertain.
It is no one's case that a 25 or even 50 basis point rate cut would make investments, most of which are pending for reasons like land or forest clearances, start humming immediately. But unlike the US, for instance, Indian monetary and fiscal policies are intimately linked. The industry recognises this and is comfortable building investment plans accordingly. This link had broken down in the tenure of the previous finance minister, one of the contributing reasons for the policy paralysis. What is needed now is a sign that the difference in perception between North Block and Mint Street does not mean that the two are beginning to draw apart again. That would be the last thing an investment-starved economy needs.
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