Wednesday, October 31, 2012

Good in intent and Deep in expression

Monetary Policy October 30, 2012: Good in intent and deep in expression.

RBI in tossing between hope and despair over the macroeconomic reform implementation decided to symbolically respond to the recent key policy initiatives by marginally bringing the CRR down by 25basis points. Its key anxiety areas are: likely rise in headline inflation triggered by cost-push and supply-retarding factors in the backdrop of not-so-very-encouraging agricultural growth; sluggish manufacturing growth; and moderation in services sector growth in the backdrop of unstable global financial stability not withstanding commodity markets easing. The slowdown in economic growth would continue to stare at us. It remains to be seen as to how much of Rs.17500cr released with CRR cut would result in corresponding increase in the credit flow to the deserving sectors. Governor could not have done better in the given circumstances, notwithstanding the pressures from the India incorporated and the Finance Minister to reduce the key rates.

If one looks at the key factors behind the slowing down of growth – the falling domestic savings – a fall from 36.8% in 2007-08 to 32.7% in 2010-11 and the estimated slowdown of further 3 -4 percent in 2011-12 is a cause for worry. More particularly, the household savings and financial assets have come down from 11.6% in 2007-08 to 10% in 10-11; a slip in savings rate of public sector by another 1.7% and the sluggish deposit growth of commercial banks during the first and second half of 2012-13 – are a fall out of the persisting inflation. The fuel rates are up; domestic gas rate is up; slowdown in agricultural production any way pushed all the farm product prices northwards; transport bottlenecks not eased; exports showed only a marginal increase; the FDI and FII investment rise is symbolic supporting the recent policy initiatives; there are clear signals of railway passenger rates going up; the prospect of rabi crop rising is marginal and therefore, the supply side constraints have no hope of easing.

Coming to the releasing Rs.17500cr, it is a matter of big doubt whether most of it would go to areas starved of credit, notwithstanding the easing of priority sector credit norms. There has been no evidence in the past that either the earlier reduction in SLR and CRR has been put through the credit window. The amounts have gone to fund the safe havens – treasury bonds. The NPAs showed a decline lately; but the decline when looked at carefully, can be traced to corporate debt restructuring. The restructured debt can be recovered only when the order books of companies increase substantially. Such recovery is remote in the backdrop of unabated inflation. The micro and small enterprise sector is crying for credit but their sob stories cannot find real answers in the backdrop of corporate fall outs. The large manufacturing sector has to keep the MSME order book rising when the banks see comfort in lending to the MSMEs and this is hard to come by. The credit to the farm sector is more government driven than the sector driven. In the light of the farmers looking for another big write-off bonanza with 2014 General Elections just one and half years away, it is hard to expect banks to go in a big way to fill the farm credit gaps. It is time that the Banks decide whether to give Rs.4500cr to a corporate that could go for restructuring and also face sovereign risk, e.g., King Fisher and the like or to spread it to 45000 clients with Rs.10lakhs where the credit risk is likely to be around 5%.

Infrastructure, real estate and retail sectors are not exuding confidence in lenders with the huge corporate debt restructuring already on their books. It is only manufacturing sector that is leaving some hope for enhanced credit flow in the next six months. Unless the Government seriously addresses the issues confronting the mining, electricity, gas and water supply, the pick-up of the manufacturing sector would continue to live in hope and so do the MSMEs. There can be a virtuous credit cycle in motion and this depends upon the reform-action rather than reform-intent.

The hope of services sector fueling growth depends on the rising disposable incomes, low interest rates and credit-fuelled consumer spending. Last year services sector expanded by 8.5%, less by 0.7% than in 2010-11. Financing, insurance, real estate and business services and construction sectors in this segment have driven the growth. The first quarter of the current year also indicated the same trend.

Easing monetary policy is a shade less important than strengthening the fiscal policy. Fiscal policy is thus far a pack of intents. The cash subsidy scheme to materialize in a country of our diversity will depend upon the aadhar linkage and this linkage is slow to materialize. The disinvestment of Rs.30000cr announced by the FM a day before this monetary policy release has many doubts on the horizon in the light of past performance and the swinging stock indices, slow investment inflows as also the unstable rupee. The current account deficit ruling high now has also left more aspiration than action.

Monetary policy announcement is an important event more to introspect and prospect than to experience a comfort and strength.