MUMBAI / CHENNAI: The RBI has done what it was bound to do in a downturn: lower policy rates to invigorate the economy. Until Wednesday, all attention was on a rate cut, which alone seemed to be the cure.
GDP growth was a pedestrian 6.1 per cent during the March quarter, private investment an abysmal 5.8 per cent, export growth fell to 10.2 per cent in June vs 18.3 per cent in March quarter, credit growth plunged and fewer jobs were created.
In reality, a quarter per cent rate cut isn’t the thunderbolt that can resurrect India’s sagging fortunes. For instance, even though the RBI had slashed rates six times in 2015 and 2016, industrial credit growth has been in free fall, plunging from 6.4 per cent to minus 1.1 per cent in June, 2017.
Private investment is constrained not due to banks’ inability to lend, but because of their unwillingness. Large corporates and banks are in a pickle, driven by ‘crazy lending’ between 2009 and 2013. The debt overhang reached dire proportions, still banks threw caution to wind, ever-greening loans, until the regulator cracked the whip in late 2015. For the past few years, the central bank has been trying to clean-up the twin-balance sheet problem, without much success.
Despite rate cuts, corporates continue to put investments and expansion on ice citing steep rates. But those looking behind the scenes are aware of their over-leveraged situation. Take for instance the telecom sector that now gives a next-to-nothing 1 per cent return on investment, much lower than the savings bank account’s 4 per cent.
The RBI hopes capacity utilisation, profit margins and employment will improve with new export orders and future output index rising. But if 175 bps since 2015 couldn’t resume the runway train of investments, how much Wednesday’s 25 bps can revive capex flow is anybody’s guess.
The onus is now on the government — to clear structural problems — and private enterprises to find their way to goose the economy.