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Journalism of Courage
Bad politics showed up the UPA last week,will it signal change with good economics this week?
Reserve Bank of India Governor Duvvuri Subbarao surprised the markets last week with a sharp 75 basis point cut in the cash reserve ratio,the percentage of deposits banks have to mandatorily keep with the RBI. This provided the banking system primary liquidity of Rs 48,000 crore and some breathing space,but just enough to take care of immediate fund requirements. While this exerts downward pressure on interest rates,Subbarao doesnt think the time is ripe to touch the repo rate,the rate at which the RBI lends to banks. That may be based more on inflation than market liquidity conditions. Inflation has eased in the food sector but the overall CPI is still above the RBIs target levels. So,in the monetary policy review on March 15,either the RBI will continue to wait and watch inflation,or could take a small step forward,maybe 25 basis points,on the rate cut cycle.
But again and again,the RBI has emphasised that price stability is unlikely to be achieved without fiscal consolidation. Thats why the Budget this Friday is an opportunity for the government to signal both reform and fiscal consolidation. Surely,it did not need the anti-Congress verdict on March 6 to expose the limits of seemingly bottomless,inefficient,welfare schemes. All eyes,therefore,will be on one key number this Friday,that of fiscal deficit for 2012-13. The deficit target for 2011-12 was set at 4.6 per cent of GDP believed to have been crossed by at least 100 basis points given the sustained high global crude oil prices and the resulting ballooning of petroleum subsidies. Finance Minister Pranab Mukherjee will try to keep the deficit at around 5 per cent of GDP,helped by,what government officials reveal,a phenomenal 8-10 per cent savings in Plan spend this year. Theres no doubt,however,that it will need political courage to start chipping away at subsidies,accelerate tax reform both direct and indirect begin expenditure reform and send a clear signal to both domestic and foreign investors that projects will be encouraged rather than stopped. In other words,for the Budget to bring back growth and reduce inflation. After bad politics showed it up so miserably last week,the UPA has an opportunity to display courage via good economics. It should not waste it.
