As a new government promises to bring the economy out of doldrums and revert back a slump, the RBI governor, Raghuram Rajan has become the new hard-task master on inflation. Modi has promised to bring about a phoenix-like rise of the economy from the ashes leftover by the previous government. Rising on the back of an anti-inflationary mood in the country and the lowest growth in two decades, the nation voted for a pro-business government which has promised to bring back the “Acche Din” (good days).
As the government settles in with its new PM, all eyes are on the Finance Minister Arun Jaitley, Modi’s trusted aide. The priority would be to bring out a pro-business budget with emphasis on easing land acquisition and availability of capital. The Modi government is concerned solely about bringing back the growth rates that prevailed in the past decade, fuelling India’s mind-boggling growth story. On the other hand, India is lucky to have a stern RBI governor whose priority since taking office has been to tackle the crippling inflation. One cannot ignore the conflicts that this may give rise to among India’s top financial honchos.
The fact is that the Congress government presided upon the India’s highest financial growth in decades. However, that doesn’t mean that they are to be credited for the overwhelming growth figures. The infrastructure development started by the Vajpayee government indeed left India shining. Only to be tarnished by the populist policies of the following government. During Vajpayee’s era, inflation rates were modest enough and one should be hopeful that after inducing high growth, the following government must be capable enough to not only sustain it but also build on it. No doubt, they had funds to splurge on their MGNREGA and Pay Commissions and Farm Loan Waivers but the question was how much? It was too late before it realized that the deficits were rising and subsequent development and productive expenditure was nowhere to be seen. Instead, it fuelled this expenditure drive, which was largely non-developmental (the productive expenditure was aptly consumed by its minsters) which powered inflationary pressures without a rise in supply and growth of essential commodities.
The result, a new government inherits an ailing economy downgraded by multiple credit-rating agencies. With inflation northwards of 8 % and growth southwards of 5 %, the government will find it tough to check one while raise another. One can only hope it won’t happen the other way round. In the recently concluded policy meet of the RBI, it kept all rates unchanged except a minor change in the SLR. This move must have been prompted by a pro-growth finance minister and would have been accepted by the subdued governor whose efforts to tackle inflation so far have been successful. What needs to be seen now is whether the government will want to increase rates thus stagnating growth or to let the rates fall and risk double-digit inflation? The only solution would be to increase the supply by ensuring expenditure is planned and leakages, in the form of corruption are minimal. India desperately needs to tide over a power crisis which has threatened the existence of several small and medium enterprises in northern and eastern parts of the country. Boosting of agricultural supply would likewise be tough with clouds of weak monsoon about. Even though one might argue that the Sensex is breaking all-time records, it is purely speculative and may collapse if growth forecasts don’t project a rosy picture in the weeks after the budget.
The silver lining here, one may find it only if one looks quite carefully, is the presence of opposite mindsets among the government and the RBI. It shall lead to healthy arguments and ensure that the country’s economy doesn’t produce a lopsided figure.