May 04, 2013 05:08 PM IST | Source:

Why Chidu and Subbu still can't see eye-to-eye

A day after the Reserve Bank of India announced its monetary policy for 2013-14, it is worth reading between the lines of Governor D Subbarao‘s statement to find deeper meanings.

R Jagannathan

A day after the Reserve Bank announced its monetary policy for 2013-14, it is worth reading between the lines of Governor D Subbarao’s statement to find deeper meanings.

The policy makes it clear that the distance between North Block and Mint Street is greater than the known distance between Delhi and Mumbai.

Consider what the Governor said, and what the finance ministry muttered.

The Governor, for one, has given the most pessimistic projection of growth at 5.7 percent in 2013-14. P Chidambaram’s budget projected 6.8 percent just two months ago, the PM’s Economic Advisory Council indicated a figure of 6.4 percent last month, and Chief Economic Advisor Raghuram Rajan’s Economic Survey gave a range from 6.1-6.7 percent.

An unhappy FM was quoted by Business Standard as saying yesterday: “Let us accept what has been done today and let us see what the future holds.” This is more neutral than his outburst last October, when he petulantly said that he would “walk alone” to boost growth if the RBI continued to refuse to play ball on interest rates.

But others were less circumspect. The PM’s personal mandarin, Montek Singh Ahluwalia of the Planning Commission, thinks that the “RBI is clearly more pessimistic than the government is. I think the government growth forecast as of now is feasible.”

The distance between North Block and Mint Street is nearly 1 percent in GDP growth terms. In money GDP terms, based on the PMEAC’s projections, that would be difference of more than Rs 113,000 crore. The PMEAC has projected money GDP at Rs 113.7 lakh crore.

The second great distance is on inflation. Chidambaram’s neutral comment was to say that if inflation comes down, there could be further rate cuts. Arvind Mayaram, Chidambaram’s Economic Affairs Secretary, seemed sure that next time (that is in the June policy) there would be scope for further rate cuts. “We do not have any doubt that when the next monetary policy is considered…they would certainly see that there are adequate reasons for reconsidering the rates which are prevailing now and push for more growth.”

Raghuram Rajan said that while there was scope for inflation to come down more, “WPI inflation has already come down a fair way.”

But Governor Subbarao is clearly a pessimist on this score. He said that the scope for further monetary easing was limited, despite the drop in growth. He guided thus: “Overall, the balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing.” Little space could mean one of two things: only one, or at best, two more repo rate cuts this year. Or none at all, if the data point in another direction.

Subbarao, ominously, noted that he was ready to reverse direction if need be. He said: “With upside risks to inflation still significant in the near term in view of sectoral demand-supply imbalances, ongoing correction in administered prices and pressures stemming from MSP increases, monetary policy cannot afford to lower its guard against the possibility of resurgence of inflation pressures. Monetary policy will also have to remain alert to the risks on account of the CAD (current account deficit) and its financing, which could warrant a swift reversal of the policy stance” (italics ours).

The third point of difference between the RBI and finance ministry is the indicators they are looking at to formulate policy. While the finance ministry thinks Wholesale Price Index (WPI) is a good pointer, the RBI clearly frets about many more things.

In an interview to The Economic Times, Subbarao said: “Even as (WPI) inflation has come closer to the threshold level, the risks are present. First, there is this consumer price inflation, which is still in double digits. That’s the inflation that people experience in the market. That shapes inflation expectations. Then there is the current account deficit (CAD), commodity prices, especially oil price, imported inflation, food prices. Then rural wages, minimum support prices and so on… So, there are several upside risks to inflation. We cannot declare victory as yet.”

The fourth, and biggest hiatus between RBI and the ministry is about what they expect monetary policy to achieve. The finance ministry wants rates cut to boost market sentiment, since this is important to business sentiment and the government’s own ability to raise money from disinvestment. But the RBI – having delayed action against inflation in 2010 and having front-loaded the rate cuts in April 2012 – does not want to lower its guard and be accused of falling “behind the curve” once again.

Subbarao also believes that the ball is in the government’s court to revive investor sentiment and growth. “Without policy efforts to unlock the tightening supply constraints and bring enduring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains could re-emerge.”

But, at the heart of it all is this reality: neither Subbarao nor the FM have much time to rescue their reputations.

Subbarao is due to retire as Governor four months from now in early September. He does not want to go down in history as the man who didn’t do enough to restrain inflation.

Chidambaram, a potential PM candidate in case we have a UPA-3 coming back to power, has to show he can do something about growth quickly. He cannot be sure how much time he has to brush up his CV. His government could fall by October, or last all the way to May 2014. He has to prove that the high growth years of UPA-1 were not a fluke. (They certainly did not have anything to do with what the government did). To earn his spurs, he has to revive growth now, rather than a year or two later.

Clashing personal reputational priorities are one part of the explanation on why North Block is so far from Mint Street.

The writer is editor-in-chief, digital and publishing, Network18 Group
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