India Inc India Inc: Friday, 23 March 2018 11:59

Growth in the times of trade wars: When will RBI cut rates if not now?

by Manoj Ladwa

A slight nudge from the Reserve Bank of India (RBI) can push India’s growth rate into a higher growth trajectory, writes India Inc. Founder & CEO Manoj Ladwa.

Here’s a grim projection: Global ratings agency Fitch expects the Reserve Bank of India (RBI) to start raising interest rates from next year.

“The minimum support price scheme for agricultural products and increased customs duties on certain products (electronics, textiles and auto parts) will boost prices against a backdrop of an accelerating growth. We expect inflation to hover a bit below 5 per cent in 2018 and 2019 in the upper band of the Reserve Bank’s target,” the agency’s latest ‘Global Economic Outlook’ said.

In the Last Word section of the previous issue of ‘India Global Business’, we had alluded to the well-known fairytale about ‘Goldilocks and the Three Bears’ in which a little girl enters the house of three bears, tastes three bowls of porridge and declares that she likes the one that is neither too hot, nor too cold… in other words, the one that is just right.

We had also wondered whether, like little children across the English-speaking world, RBI Governor Urjit Patel and the five other wise men of India’s Monetary Policy Committee, who sit around the table to decide the macro rates that determine the cost of money in India, were aware of the story – because the Goldilocks analogy is also applied to national economies that set a fast pace of growth accompanied by a low-to-moderate rate of inflation.

Facts & figures

If we go by the latest numbers released in March, India’s factory output, as measured by the Index of Industrial Production (IIP) expanded at a robust pace for the third consecutive month, at 7.5 per cent in January 2018 even as the Consumer Price Index, which tracks retail inflation, declined for the second successive month to 4.4 per cent in February. The comparable previous month figures were 7.1 per cent for IIP and 5.1 per cent for CPI.

But this, like most statistics, tells only half the story. It does not reveal that inflation had spiked sharply from a low of 1.5 per cent in the middle of 2017 to more than 5 per cent in December before moderating to 4.4 per cent in February.

The main cause of rising inflation was an increase in food prices. The other worry on the inflation front – retail oil prices – have been kept in check by the decision of the government to reduce excise duties in a calibrated manner to keep pump prices of oil stable.

However, if one were to set aside this background for a moment, it will be evident that the Indian economy has shaken off the effects of demonetisation and the introduction of the Goods and Services Tax (GST), two very necessary but highly disruptive structural reforms.

Poised for growth

The latest Fitch report bears this out by stating that the Indian economy is poised for strong growth over the next few years, though it adds that this growth will be accompanied by rising inflation.

If one takes a disaggregated look at the inputs that went into these headline figures, it will be evident that the high rate of growth was driven by the manufacturing sector, which maintained its recent accelerated rate of growth, expanding 8.69 per cent.

Even more encouraging is the fact that the capital goods sector grew at a very robust 14 per cent, indicating that a broad-based industrial recovery led by a revival in private industry is underway. Just as encouraging is the 7.6 per cent growth in electricity generation, which, again points to rising activity in India’s sub-optimally functioning factories.

Readers will recall that the reluctance or inability of the Indian private sector to invest in expanding capacities has hamstrung headline growth in the Indian economy.

The lower rate of price rise was as result of falling prices of vegetables and fuel and light.

If this trend sustains through the current quarter – and economists are unanimous that it will – then the growth rate for the full year will be around the 6.75 per cent mark as estimated by the Economic Survey.

Trade wars

A few caveats will, however, be in order: The full effects of GST are yet to play out fully but most economists say that the main glitches have already been addressed.

Then, maverick US President Donald Trump has just announced tariffs on $50 billion of Chinese exports to the US. This is in addition to his earlier decision to impose additional tariffs on steel imports. At the time of writing, China was reported to be preparing a list of US imports on which it would impose retaliatory duties.

At this point, one doesn’t know the extent to which Trump is ready to go but if this proves to be the first salvo in an all-out global trade war, then India cannot remain unaffected by its fallout.

Another fear is that the higher minimum support prices announced by Indian Finance Minister Arun Jaitley in his Budget could lead to a rise in government borrowings, thus, squeezing out private sector borrowers from the market, and the resulting higher prices of food could fan the rate of inflation and force the RBI to increase the cost of money.

A nudge in time

But all that is in the future. When the six wise men gather around the table at the RBI head office in Mumbai on April 5 to decide on interest rates, the data they will see will be just right – of the kind Goldilocks would have approved.

And if a global trade war breaks out, India may not be left with many options to generate domestic growth, especially if exports get hurt as a result.

But the central bank has, over the past four or five years, displayed a stubborn determination to only pursue its mandate to check price rise, completely ignoring its obligation to also facilitate growth.

A slight nudge from Patel and his associates at this point in time can push India’s GDP growth rate into a higher growth trajectory and set in motion the market forces that have felt stifled for long.

But will they pay heed to the cries of Indian industry? The road to 8 per cent-plus growth could depend on the answer to that simple question.

Manoj Ladwa is the founder of India Inc. and chief executive of MLS Chase Group @manojladwa

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