The Indian economy is going through a rough patch. This is borne out by a series of economic indicators released in the recent past. In the fourth quarter of 2011-12, GDP grew by a modest 5.3 per cent bringing overall growth for fiscal 2011-12 to a low of 6.5 per cent. Industrial production has been lacklustre with IIP registering growth of a mere 0.1 per cent in April 2012. Trade data for May 2012 too has been uninspiring and points towards the difficult period our exports could face in the months ahead. These numbers when viewed in conjunction with leading indicators of economic activity show that growth in 2012-13 could come under further pressure unless corrective actions are taken fast.
RBI’s mid-term monetary policy review on June 18, 2012 presents one such opportunity to lift sentiments and boost growth. In its recently released 12-point action agenda for stimulating Indian economy’s growth, FICCI suggested that RBI should consider a calibrated cut of 200 bps in repo rate and 100 bps cut in CRR over the next few months. While RBI signalled a change in its policy stance by introducing a rate cut in April 2012, it is time that it follows through and continues with this process so that interest rates in the economy come down and liquidity situation improves. A 50 bps cut in both repo rate and CRR on June 18, 2012 would encourage investors.
On inflation, we understand that RBI has its concerns and these were reiterated in the last few days. However, in our view inflation in India is largely a supply side problem. And to deal with such a problem using monetary tools may not be the right approach. Rather, at a time when more supplies—both for agri-commodities and industrial raw materials— are needed, a high interest rate environment, by disincentivising investments and hence greater supplies, may actually worsen the inflation situation.
In any case, if we look at the core inflation number then we see that this has come down and continues to be below the 5 per cent mark. Further, with global commodity as well as oil prices showing signs of softening, the RBI should have more leeway to go for a rate cut in its upcoming monetary policy review.
Today, the slowdown in growth we are seeing has already started taking a toll on employment generation. Any further slippages in growth could severely compromise creation of new job opportunities. With a large pool of aspiring young people in the country and with millions joining the workforce every year, a prolonged slowdown in the economy and in the job market could become a critical social issue in no time.
We must avoid such a situation and the central bank can help here by curtailing interest rates as this would boost investments, generate growth and create more employment in the economy. With the external environment, particularly the situation in EU, looking increasingly uncertain, we must strengthen our domestic growth drivers. Central banks in countries such as China, Australia, Vietnam and Brazil have moved swiftly to support growth. It is time RBI does the same.
The author is President, FICCI. The views expressed are personal