Tread with caution
State Bank’s monetary easing – interest rate at eight percent now, lowest in 13 years – opens yet another window to stimulate investment and spending, but success will ultimately depend on how much autonomy the Bank really enjoys and how far the government, and those in power, are kept from the money market. It won’t do much good, like so often in the not so distant past, if the easy lending regime is exploited by a government neck-deep in debt. If there’s simply a repeat of cheap credit making its way to government accounts for day-to-day business, the private sector will stay crowded out and the economy will be stagnating again before long. On the other hand, if those with power are first in line for loans, as usual, we are likely to see a few more sugar and cement mills, but not much is likely to go the private sector’s way.
And it’s not just its autonomy that the Bank will have to guard. It must also do a better job of explaining its dovish position. We are told that inflation has come down from 10 to eight percent already, and the Bank now expects it to drop to four percent by the time the outgoing fiscal is up. But how it will get from 10 to four percent inside 12 months, especially when there is a credible case of the rupee weakening against the dollar (for a host of reasons), is not explained too well. Also, when domestic policy is based on gains made through ‘recent foreign exchange inflows and lower oil price’, there is the danger of associating exogenous trends with indigenous policy.
Nevertheless, there can be no denying that the economy needs a shot in the arm, and no better way of doing that than getting the private sector to take the lead, especially when the security situation, not to mention bureaucratic hurdles, does a good job of keeping foreign investors at arm’s length. It is now for the Bank, as regulator, to make sure funds are directed to the right areas. And interestingly the government machinery, especially the finance ministry, will not only have to ensure that nobody fiddles with market liquidity, but also that its own blue-eyed are not overly enticed by the opportunity. We have had easy monetary regimes diluted before. Therefore all parties involved must tread with caution.
