(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Andy Mukherjee
SINGAPORE, Jan 29 (Reuters Breakingviews) - India's latest
interest rate cut won't revive growth. The central bank's
quarter-percentage point reduction in the policy rate, to 7.75
percent, is just as futile as the last one almost a year ago.
GDP will pick up when New Delhi curbs its own profligacy and
improves the investment climate. The February budget may be the
current government's last chance to do both.
If companies aren't investing, it isn't because monetary
policy is too tight. With 10.6 percent consumer-price inflation,
the base rate for borrowing in 10-year bonds was already
negative in real terms before this last rate adjustment. Rather,
the government's quest to fund itself is crowding out the
private sector. Banks are forced to buy up government bonds,
meaning two-thirds of what households save in a year is
reinvested in public debt.
Bottlenecks choking growth are also in need of attention. A
debilitating coal shortage is hurting electricity production.
Meanwhile, road builders are wriggling out of contracts with the
highway authority on the pretext that the environmental
clearances promised to them are taking too long to materialize.
Such factors help explain why GDP growth for the financial year
is expected to slow to a ten-year low of 5.5 percent.
Deep interest-rate cuts are currently impossible because of
inflation. Rural wages are rising at an annual 18 percent pace.
If more money isn't matched with greater investment and output,
the result would merely be a further boost to imports, widening
India's 5.4 percent current account deficit. For now foreign
investors are helping to finance that through their purchases of
Indian stocks and bonds, but it would be unwise to rely on that,
especially if India's broader economic improvements don't take
Growth thus depends on what New Delhi unveils in February.
Finance minister Palaniappan Chidambaram has promised fiscal
consolidation and other reforms. If he avoids the temptation to
indulge instead in vote-buying populist measures that increase
the government's spending commitments, there may be hope not
just of another rate cut, but of a recovery too.
- The Reserve Bank of India cut its policy interest rate of
8 percent by a quarter-percentage point on Jan. 29, the first
reduction since April 2012. To ease liquidity conditions, the
monetary authority also pared the ratio of deposits banks are
mandated to keep with the central bank as cash by a
quarter-percentage point to 4 percent.
- In its quarterly review of economic and monetary
developments, the central bank said that an improvement in
investment climate is a "prerequisite for economic recovery" and
that the "quality of fiscal adjustment remains a concern." Risks
remain from "suppressed inflation, pressure on food prices and
high inflation expectations getting entrenched into the wage
price spiral," the monetary authority added.
- While demand conditions are "tepid," a current account
deficit of more than 4 percent of GDP for a second straight year
makes it necessary for the authorities to remain prudent while
stimulating aggregate demand, the Reserve Bank said.
- Reuters: India's central bank cuts policy rate by 25 bps,
- For previous columns by the author, Reuters customers can
(Editing by John Foley, Katrina Hamlin, and Robyn Mak)