No Proof Required: Jaago, aur jaagte raho

GDP price deflator is negative. So why can’t the RBI cut rates?

Written by Surjit S Bhalla | Published: December 18, 2015 12:03 am
GST-Re-480 Due to the Congress changing the goalpost so often, one is left with the impression that the party would rather go into oblivion than pass the GST bill.

Economic life is expected to return to normal now that the US Federal Reserve rate hike of 25 basis points is done with. Normal economic plans can now be made. Simultaneously, in India, the goods and services tax (GST) is not happening, at least in this session of Parliament. There are lessons to be learnt for the BJP and Congress from the GST tamasha. Due to the Congress changing the goalpost so often, one is left with the impression that the party would rather go into oblivion than pass the GST bill.

It has been amusing to hear the Congress speak on the non-passage of the bill. It first started, much like a crybaby, by saying, “Mommy, mommy, look he is not even talking to me!” The BJP obliged, held discussions with the Congress leadership, and it looked like the GST might pass. The party also laid down its three preconditions for the bill’s passage, two of which were the removal of the 1 per cent transfer tax (accepted by the BJP) and a GST rate less than 18 per cent (the BJP agreed to an even lower rate). The third demand was to do with a dispute resolution mechanism — the Congress reasons for this strange “demand” are too embarrassing for a family newspaper to print. So, what is holding up the passage of the GST? Nothing, except the crybaby Congress.

The best way to deal with an obstreperous baby, as all parents know, is to ignore it. The BJP’s attitude towards both the Congress and the GST should be, we don’t care. And have some pity for the Congress, unka sab kho giya, wo bechare ab kya karen? (Those who have lost everything, what else can they do?) All they can do is jump up and down, shout slogans, obstruct Parliament and behave like juveniles.

The BJP and PM Narendra Modi should concentrate fully on the economy, and instead of “big-ticket” items that the juvenile can obstruct, they should go for more mundane but productive policy actions, like providing a comprehensive insurance package for farmers (can the Congress dare oppose it?); working with the RBI to provide a package for stressed banks; working towards streamlining corporate tax rates; modernising the personal income tax system; using Aadhaar to reduce corruption in schemes like MGNREGA and food distribution; and accelerating reforms needed for the ease of doing business. As it happens, the Modi government has plans on all of the above. Soon, foreign and domestic investors will forget about the GST. And then where will the Congress be?

The BJP realises (I think) that the Indian economy, despite many negative doomsayers and doom-forecasters, is poised to be much stronger next year. The best news for the economy has gone mostly unnoticed. Inflation was so low that it was negative (GDP deflator inflation). This will have consequences and implications for RBI policy. However, you will not find interest rate cuts news in most of the writings of foreign and domestic investment banks.

In India, we only talk about how the GDP deflator is negative; how, very unusually, nominal GDP growth is lower than real growth; how GDP growth is actually very low; and how it feels like 5 per cent growth. But there is no mention that policy interest rates need to be reduced. Why? Because, didn’t you know, wholesale prices are “contaminating” consumer prices and making the deflator artificially negative. So in conclusion, consumer inflation is quite high and likely to go up, and the RBI has no room to cut policy rates further.

If you peruse their writings, you will find that the “experts” fret about whether the fiscal deficit will be contained at 3.9 per cent; whether GDP growth is correctly measured (“no it isn’t,” says the chorus, coincidentally composed of a disproportionate number of those aligned with the Congress); and why rate cuts by the RBI should be delayed because pulses inflation is so high. Further, remember that the RBI anticipated this high inflation and therefore frontloaded interest rate cuts. Is there any basis to this stream of consciousness?

What are the facts? The repo rate is now at 6.75 per cent; the personal consumption deflator in the national accounts (not biased by wholesale prices) was at 1.4 per cent, a year-on-year record low during June-September 2015. Yet, there is no room for the RBI to cut rates because pulses, which account for 2.4 per cent of total consumption, suggest that inflation is too high.

In any case, our experts argue that cutting interest rates is like pushing on a string. Corporations are not investing because capacity utilisation is too low, and because they have too many bad loans, stressed assets, etc. Arrey bhai, what can one do for stressed assets and lack of demand, declining prices and low animal spirits? Cut interest rates, that’s what. RBI Governor Raghuram Rajan is right in goading and cajoling banks to transmit lower interest rates to consumers. Many of the leaders of these banks are still caught in the old trap that savings are a function of deposit rates — and we need to keep nominal rates high in order to attract deposits. Jaago, behen, jaago, duniya badal gayi hai.

While on the subject of exorbitant real rates, here is something for the RBI to chew on. It should look at the interest rates credit card companies (banks) charge, sorry, overcharge. Even the worst money lender in the world does not charge as much as what credit card companies in India are legally allowed to. Time for the RBI to wake up to this non-transmission also.

The writer is contributing editor, ‘The Indian Express’, and senior India analyst, The Observatory Group, a New York-based policy advisory group.

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  1. K
    Dec 18, 2015 at 2:13 pm
    Already there are a cobweb of taxes surrounding the common man. Now, another one is going to be added. In the frenzy of simplication, the tax regime is getting more complicated.
    1. A
      Dec 18, 2015 at 9:03 am
      If Shri Surjit-ji Bhalla wants to avoid sounding like a party spokesman on News Entertainment television, he should perhaps apply his mind to wonder why despite browbeating Raghuram Rajan into a rate cut, yields on Govt. paper have not moved at all. In fact they now quote at a rate higher than the one that prevailed before the 50 bps cut by RBI ! Browbeating an economist-bureaucrat, even it happens to be a high profile one like Rajan, is easier than getting thousands of crores of Rupees to trade at lower Yields. None of Shri Bhalla's arguments have cut any ice with the Money Markets in the last many years he has been propounding his rate cut theories. To paraphrase one Arun (Shourie), the other Arun (Jaitley) has managed headlines alright (RBI cuts rate), but hasn't been able to manage the economy (Yields remain as high).
      1. C
        Cindy McCraw
        Dec 18, 2015 at 11:18 pm
        I work with a lot of small business people in the U.S. Low interest rates are one of the most important determinants of their capital equipment purchases. Even a couple of percentage points can make the difference between being able to afford the payment or not. I know the big picture is much more complicated, but it seems to me that reducing rates makes a lot of sense. Small business drives the economy from the ground up. And when entrepreneurs can afford to buy equipment and hire people to operate it, it's a good thing.
        1. A
          Dec 18, 2015 at 2:20 pm
          You are an old man but yet immatured. Time is not for further reduction in interest rate but time for your to grow....mentally at the least. By the way do you really understand M4?
          1. N
            NG Boss
            Dec 18, 2015 at 5:15 am
            This emerging market advisor Bhallaji is laying ground for next spell of Bull Run in equity market😜😜
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