By Chidambaram N
The Reserve Bank of India seems to have finally woken up to the all-pervading economic slowdown though it is still under the misconceived notion that mere lowering of interest rates will result in the revival of the economy. The CPI and other left parties have focussed on the inefficacy of this claim. They are certain that that however hard the RBI and its present governor try and bring down the repo rate to zero level, private investments and thereby revival of growth will not come into effect. Corporate houses everywhere in the world are pathologically inclined to reap profits at minimum risk level. Zero rates, of course, will be made use of fully by them to amass cheap funds to pay off old debts or lay foundation for more profitable new ventures or in accumulating more tangible assets. The central bank is only hoping against hope that economic revival will take place sans consumer spending.
One in fact finds that something is nauseating at the corridors of power or at the boards where emissaries of power rule the roost and play second fiddle to the mandarins of North and South Blocks in the national capital that house decisive power centres. The unconventionally low spirits seen in the markets reflecting the same on the faces of buyers in the festivals’ month of October essentially establishes the fact that unless money is put into the hands of consumers, growth per se is not at all possible.
Substantiating further the scepticism over the remedial effect of rate cuts, banker S S Mallikarjuna Rao who moved to Punjab National Bank last week as its CMD has in an interview to a English daily observed: “Interest rate reduction for advances can’t be a panacea for the economy. There is a limit below which you can’t reduce rates. Repo rate has come down to the lowest level in the last nine to 10 years and there is an indication that it may reduce further. In our country, if deposit rates go below six per cent, there will be social uneasiness as many senior citizens depend on the interest income. If alternative investments are available, principal is not always assured. So, we need to ensure interest rates are not very low.”
Poo-pooing the claim that a rise in the profitability of companies following the cut in corporate tax rates will lead to an uptick in private sector-led investment, a study conducted immediately after the tax cut point out that lack of funds is not really a deterrent to fresh investment. It observes to the amusement of all concerned that BSE 500 companies had cash and cash equivalent of around Rs 8 lakh crore as of March 2019 and still they have been holding on to their cash and not investing. It has to be noted here that private investment in the economy has stood very low over the last few years.
Is it a case of the left hand not knowing what the right hand is doing? The very consumer sentiment survey for September conducted by RBI itself finds that the consumer confidence has dipped to six-year low as sentiment around employment, income and discretionary spending declined. The consumer confidence has weakened in September, with both the current situation index and the future expectations index recording declines. Also the sentiment for the overall economy and employment declined and people were seen less optimistic about their income over the year ahead. Is there any extraneous reason for the apex bank not to read the writing on the wall and act accordingly?
Meanwhile, overall financial flows to the commercial sector have declined sharply, by around 88 per cent, during the first six months of the current financial year amid the slowdown in the economy. According to the latest RBI data, the flow of funds from banks and non-banks to the commercial sector has been Rs 90,995 crore in 2019-20 so far (April to mid-September) as against Rs 7,36,087 crore in the same period last year. Credit growth to services has decelerated sharply since January 2019.
Despite all pampering moves, foreign portfolio investors (FPIs) have offloaded equities worth around Rs 3,000 crore in just three trading sessions of October amid fears of global recession and trade war. This follows a net investment of around Rs 7,850 crore by them in equities in September. According to data, overseas investors pulled out Rs 2,947 crore from equities and Rs 977 crore from debt on a net basis. This resulted in a total net outflow of Rs 3,924 crore from the Indian capital markets during October 1 to 4.
Singing the same tune, the RBI has downgraded the GDP growth projection for 2019-20 by more than a full percentage point — from 7.2 per cent in April to 6.1 per cent now. However, six months back in April, the tone of RBI statement was quite buoyant. It had then said private consumption remained resilient, and was expected to get a “fillip from public spending in rural areas and an increase in disposable incomes of households due to tax benefits”. In August, it had said: “Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture.” In October the central bank reduced its key policy rate by 25 basis points saying that the “continuing slowdown warrants intensified efforts to restore the growth momentum” putting the repo rate at 5.15 per cent, the lowest since March 2010.With this, the central bank has pruned rates by 135 basis points in just seven months since the rate cut cycle started in February. Of this, until August, banks had passed on 29 basis points to borrowers.
One only wonders when the central bank will turn saner and bat for an immediate demand-side intervention. It can, as a reward for the silent and quick transfer of surpluses to government’s kitty, demand that individual income tax rate must be cut in the same magnitude of the corporate tax cuts that are being highly publicised as the sincerest cut of all to prop up growth.
The National Statistical Office data show, private consumption expenditure, which contributes more than half the gross domestic product and is the mainstay of demand, has decelerated so sharply that at 3.1 per cent, the expansion is at an 18-quarter low. Automobile sales continue to plunge, posting their worst drop since the Society of Indian Automobile Manufacturers (SIAM) started collating wholesale vehicle sales data in 1997-98. The absence of demand is all pervading covering almost every key sector: from consumer durables to biscuits and housing.
Experts who find in the monetary policy statement, announcing cuts in repo rate and growth forecast, a negative reading, rightly sees a serious slide in the economy. 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. (IPA Service)