RBI’s Rate Cut: Beginning of the End of Uncertainty in Investment & Growth

The Reserve Bank of India (RBI) Governor, Raghuram Rajan, and the vice-chairman of the newly-launched National Institution for Transforming India (NITI), the organisation which has replaced the Planning Commission, Arvind Panagariya, may be critical of Prime Minister Narendra Modi’s initiatives such as ‘Make in India’ and ‘Shramev Jayate’ (labour reforms), but it is widely agreed that his Government is putting in place the building blocks for rapid economic growth and has created a positive global sentiment for investments in India.

It would not an exaggeration to say that the atmosphere for investment created by Modi recently has put tremendous pressure on the RBI to rethink its hawkish stand on interest rate cut. Coming ahead of the RBI policy announcement, the decision to cut rate clearly shows a positive trend.

The main concern for the industry is high rate of interest which is hampering the credit flow to it. Undoubtedly, cost of credit needs to be brought down on urgent basis. In a surprising move the RBI Governor, climbing down his hawkish stand, cut rate by 25 point basis. The move is encouraging and clearly shows RBI’s shift in stance in favour of growth. The RBI wanted to be doubly sure that inflation remains in a manageable range for a longer period.

Need for an attractive interest regime

It was expected that the RBI will take the rate cut decision in the coming monitory policy review in February, but it appears that the move has come at a very appropriate time, even before the review and the Budget announcements. This will certainly create rooms for policy reforms. Global trends are, by and large, positive and it was difficult for the industry to face a prolonged period of uncertainty. Now, a prolonged period of uncertainty should end and it is obvious that with the RBI’s decision that the process has started. The move would have wider implications as investments have not shown a rise for quite some time and overall demand is almost stagnant.

We talk about investment friendly reforms but it is also true that any reform, without an attractive interest regime, would not be able to attract investment in the present economic conditions in the country. To push growth, reforms must be comprehensive and inclusive.

Much hyped ‘Make in India’ aims to bring in huge investment to the country. The success of ‘Make in India’ initiative would, however, depend on regulatory, tax and subsidy reforms along with public investments in human capital. These reforms are essential to push growth. It is right time to ask whether the new Government’s efforts have started yielding positive results? The answer, perhaps, is yes.

Global sentiments are positive and it is evident from the remarks of Jim Yong Kim, the World Bank too. Kim while at the Vibrant Gujarat Summit recently said, “India is pursuing reforms that could accelerate growth in its economy and this could more rapidly reduce poverty and spread prosperity to more people in the country who are marginalized and vulnerable.”

Encouraging trends of economic revival

Appreciation from the World Bank is not out of place. The recently released Index of Industrial Production (IIP) data also indicate a turnaround. Growth in industry output, as measured in terms of IIP, for the month of November 2014 is estimated at 3.8 per cent as compared with (-)4.2 per cent during October 2014. The growth in the three sectors of mining, manufacturing and electricity in Nov 2014 stands at 3.4 per cent, 3 per cent and 10 per cent, respectively, as compared to 5.2 per cent , (-)7.6 per cent and 13.3 per cent in Oct 2014. The manufacturing sector should be given a major impetus especially at a time when multinationals have started looking at India as a viable investment option.

​The trends are certainly encouraging and with reformist approach this revival could be transformed into a firm recovery.

Apart from credit flow and rational tax regime, the Government will have to streamline governance with regard to project implementation. Deadlock surrounding mega projects must end now if we want a stronger growth with jobs. A jobless growth would not put any money in the people’s pocket and India will have to face a longer period to come out of its low income country tag, in that case.


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