By keeping the repo rate unchanged and warning that fiscal slippages could stoke inflation, the Reserve Bank of India has virtually lobbed the ball in the government’s court. The onus is now on the NDA government to take appropriate policy measures to arrest the steady decline in the GDP growth rate, spur growth and boost investments. Those hoping for the central bank to pitch in with a liberal rate cut must be a disappointed lot but the key objective of the monetary policy is to keep inflation under check and ensure that there is an overall balance in the system. Clearly, the RBI’s Monetary Policy Committee has adopted a conservative approach by keeping the key policy rate untouched at 6% and the cash reserve ratio unchanged at 4%. It has acknowledged the slowdown in the economy and lowered the growth forecast for 2017-18 to 6.7% from the earlier 7.3%. At a time when there are high expectations about populist stimulus to boost the economy, RBI Governor Urjit Patel has warned the government against loan waivers and fiscal stimulus as it will raise fiscal deficit and fuel inflation. This must serve as a wake-up call for the government grappling with the slowdown even as the global economy is showing signs of gaining momentum. However, breaking his silence on the state of the economy, Prime Minister Narendra Modi has put up a brave front. In fact, he went on the offensive, hitting back at the critics for spreading pessimism on the basis of ‘just one quarter results’ and sought to assure the nation that the growth was well on track and the economic fundamentals remained strong.
While Modi’s promise to continue the reforms process and unveil further set of policy measures to accelerate growth is quite reassuring, a plethora of challenges, including industrial slowdown, weak private investment, discouraging exports and the prospect of lower agricultural production, calls for deft handling to navigate the structural transformation. The double whammy impact of the demonetisation and the Goods and Services Tax (GST) on the economy cannot be wished away. Notwithstanding the hurried and flawed rollout, the GST is a reform that is inevitable for the country to make the systems transparent and effective. The additional revenues expected from this regime can provide a cushion for additional spending. The technical glitches in the implementation must be resolved quickly to facilitate ease of doing business. Pumping money into rural infrastructure and affordable housing will also help stimulate growth. However, a delicate balance has to be maintained between the need to spur growth and maintain fiscal discipline. The bad loans problem can be effectively addressed by the new bankruptcy law and it must be supplemented by recapitalisation of banks.