Cutting it fine

The difference between the RBI and the government at this juncture is simply on whether rate cuts will spur investors to bring more money to the table in the next fiscal. The government believes there is some scope for action if the RBI reduces the rates to make money less expensive to spur investors. The RBI believes it will not happen in a period of policy paralysis,so rate cuts are not warranted. Governor D. Subbarao maintains that a rate cut at this juncture can only spur headline inflation to even more than the 7 per cent projected by the RBI for this fiscal. This is because the gap between actual output and the trend rate of output for the economy is thinning. In other words,the RBIs argument is that the economy has scarce chance to improve its capacity so a higher money supply would simply spur prices to rise.

This will be the first call for the next finance minister,P. Chidambaram. The rising interest cost has begun to hurt the corporate sector. Companies have responded by drastically slashing inventories running at minus 23 per cent for 2011-12. This is an unsustainable situation where companies can topple over,and they are doing so. How long the Indian economy can hold on to this situation is something the finance minister will have to soon tell us.