Be soft,be safe

Growing agreement on continuing with easy money. Hope it lasts long enough

There now seems to be a consensus across the political/technical policymaking establishment that Indias economic recovery needs care more than discipline and,to that end,monetary policy should keep things easy. The finance minister spoke of the need for continuing with an easy money regime,echoing what the RBI governor said earlier. Since these statements come at a time the official measure of cost of living,the consumer price index CPI is in double digits and climbing,it is not unreasonable to assume that

a certain nuance,absent when monetary policy was hardened last,is informing policymaking deliberations. Put simply,that nuance involves recognising that even if prices of some essentials are increasing,the capacity of short-term interest rates the main monetary policy variable to influence these prices is extremely limited. These are supply side issues,more serious in case of some commodities than others,and require short-term imports,for example and long-term better farm to fork supply chains responses that have nothing to do with the RBI.

The critical question is the vulnerability of this nuanced approach in the face of an attack of political panic,which may be engendered if a few essentials exhibit headline-hogging price trends. If nerves are held then,if arguments linking potato prices and the short-term interest rate are still pronounced as false,Indias economic recovery will have the policy regime it deserves. Monetary policy over the next few months will have to be especially accommodative because the fiscal policy party should

ideally be winding down. Coherent tax reform demands that status quo ante be restored vis a vis post-crisis indirect tax breaks. Fiscal reform means cutting down on deficits and therefore removing the economic impetus government consumption expenditure provided over the past few months.

Interest rates therefore will have to stay soft,indeed perhaps get softer,so that private investment,the biggest spur for high growth,can soon do what it was doing between 2003 and 2007. Policymakers must appreciate that

Indian business is far less equipped now than it was in late 2007,when monetary policy was seriously and wrongly hardened,to absorb a rate rise shock. A rate shock now will have not just short-term but also medium-term consequences. And remember,the medium-term goal for India should be nothing less than getting back to 8-9 per cent growth.