By Anjan Roy
While until now, the Reserve Bank has maintained a more nuanced view of the current slow-down and tended to attribute it to cyclical factors, the fine print of RBI’s policy statement on Friday betray its concerns about the future.
The Reserve Bank’s monetary policy statement, with the announcement of cuts in interest rate (5.15% from 5.40%) and GDP growth forecast (6.1% for FY20 from 6.9%) makes for a negative reading. Such a sharp downward revision of the GDP growth prospects is really reflection of the depth of concern, maybe.
A cut in the interest rate is unexceptionable at this point of time when the economy is going through a serious slide and the lowering of the interest rate should encourage further economic activity. There was expectation that the RBI might have introduced an even deeper cut. Maybe, the present cut should read in combination with the government’s fiscal measures to provide a leg up to the economy.
However, the usefulness of interest rate for influencing broad macro-economic factors is looking askance. However much the Reserve Bank cuts the interest rates unless these are quickly transmitted to the borrowers by lowering on-ward ending rates, there is little use lowering policy rates. The governor of RBI, Saktikanta Das, has admitted once again in course of his post-policy press conference. Monetary transmission is “work in progress” he has observed.
While rates have been cut by 135 basis points over a period of nine months, fresh rupee loans have been given only by 29 basis points lower. There is still room for cuts in banks’ lending rates so that the moves encourage investment or at least reflected in the consumer loans which can play a critical role in raising demand for consumer durables. Along with rate cut, larger flow of credit would also have helped matters but this also seems to have demonstrated a kind of sluggishness. Credit growth both for production activity, as well as, greater consumer loans would have worked for pushing up consumer demand in the economy.
Indeed, the lack of consumer demand is the major concern and as we have seen so far these have not been really aided by the recent fiscal moves. As articulated by many leading economists and experts earlier, the cuts in corporate tax rates did not so far translate into higher investment by private sector companies and thus push up overall investment level. Nor of course this is expected because for the tax cuts to take effect the lag period would necessarily to be much longer.
Such investments could come only if capacity utilisation levels to up across the board and companies see the need for augmenting their production capacity. Quite on the contrary, the capacity utilisation figures remain subdued so far, as the RBI itself has noted in its review of the state of the economy.
Capacity utilisation (CU) in the manufacturing sector, measured by the OBICUS (order books, inventory and capacity utilisation survey) of the Reserve Bank, “declined to 73.6 per cent in Q1:2019-20 from 76.1 per cent in the previous quarter.” However, seasonally adjusted CU rose to 74.8 per cent in Q1:2019-20 from 74.5 per cent in Q4:2018-19. Manufacturing firms polled for the industrial outlook survey (IOS) expect capacity utilisation to moderate in Q2:2019-20.
The Reserve Bank’s business assessment index (BAI) also fell in second quarter of 2019-20 due to a decline in new orders, contraction in production, lower capacity utilisation and fall in profit margins of the surveyed firms.
The only cause for cheer could be that there has been more than normal rainfall and that has pushed up the soil moisture levels of spoil in central India, particularly, and could be precursor to farm sector revival. Water level in the reservoirs is also at record high.
“The prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand.” Can’t be disputed, still today more than half of our population lives in the rural areas and agriculture and agro-related activities sustain their livelihood. Any improvement in that segment could therefore give the necessary push for consumer demand.
But beyond that thin ray of sunlight from the farm sector prospects, there is a kind of unavoidable overall gloom in the Reserve Bank’s overview of the economy. The institution that the RBI is, and its independence from the government, the central bank could not have ignored all the figures which are coming out giving insights into the weaknesses of the economy. In fact, there were pointed references to these weaknesses. Fairly honestly, the RBI says the prospects are downbeat. These are, briefly:
Industrial activity weakened as production of capital goods as well as consumer durables contracted. Consumer non-durables however expanded. Eight core sector industries contracted, while capacity utilisation, going by RBI surveys, declined. Worse, capacity utilisation is further feared to drop.
On the other hand, services sector, which accounted for the greater part of the economy, is showing signs of further weakening. Both rural demand and urban had dwindled, going by sales of tractors and passenger cars. Commercial vehicles sales also have dropped.
While inflation is projected to remain range bound between 3.5% and 3.7% in H2 of 2020, the short term inflation showed u tick due to rise in prices of fruits, vegetables and pulses. If anything, the low prices of farm products, as we have maintained all along, had in fact drawn down purchasing power from the hands of the rural folks and possibly sparked off the initial slow down. Inflation expectations, on the contrary, remains elevated, going by RBI surveys of consumers’ inflation expectations.
Lower global prices for crude and gas were reflected in subdued fuel price inflation. This is hoped to continue. This is hopefully a major On the whole, depending on a turn-around in the farm sector, the RBI hopes that domestic demand should improve as also the level of economic activity. (IPA Service)