Growth or stability -- tough choice for Finance Ministry and RBI

(Rajiv Deep Bajaj is the Vice Chairman and Managing Director of Bajaj Capital Ltd. The views expressed in this column are his own)

By Rajiv Deep Bajaj

The choice couldn’t have been tougher. Had this question been asked nine months back, the answer would have been heavily in favour of growth. But the way things have shaped up since March 2009, it is equally important today for India, to focus on managing inflation and ensuring financial stability, lest we put ourselves at the risk of committing the same fallacies that led to the recent financial crisis.

The policy regime thus has to be a fine blend of measures to ensure the following - the growth momentum, regained of late, is not lost; inflation, particularly asset price inflation, does not reach unmanageable levels; and foreign capital inflows are absorbed and channelized into productive use such as building infrastructure.

On the growth part, though we have seen real GDP growth stabilizing between 6-7%, much of this should be attributed to the stimulus packages given by the government in the later part of 2008 and early 2009. Some green shoots are definitely visible but a sudden removal of the accommodative monetary and fiscal stance can have a detrimental impact on the recovery process.

The spurt in core sector growth and industrial output, though encouraging, should be taken with a pinch of salt as much of it is due to the statistical impact of a lower base. Also, credit growth, a barometer of infrastructure and manufacturing activity, is yet to pick up, leaving some room for caution.

The strong corporate earnings growth is also partly due to lower costs which are a direct result of the cost cutting measures deployed by businesses over the last 12 months. A strong growth in sales volume will be the most concrete indicator of a recovery.

Till now, Corporate India has banked on equity markets, domestic as well as foreign, to raise funds. A plethora of QIP issues have helped them resurrect their balance sheets. But they will need to have access to bank credit in order to fund their expansion plans going forward. Hence, it is in their interest that the interest rate regime be kept benign, stable and devoid of the volatility that has been seen in G-Sec yields in 2009.

Inflation, on the other hand seems to be rearing its ugly head again. With the liquidity glut leading to a rise in commodity prices globally and erratic monsoons contributing to escalating food prices, consumer price inflation is back in double digits.