Sanyal pitches for more rate cuts from RBI to boost growth

Principal Economic Adviser Sanjeev Sanyal on Tuesday indirectly pitched for further rate cuts from RBI to support the growth where he said there is far more space on the monetary side than the fiscal front for lifting economic growth.

Noting the gloomy start to the current fiscal with a dismal 5 per cent growth in the first quarter which is the lowest in six years, broking house Kotak Equities recently said it sees the RBI cutting its key interest rate by 40 basis points (bps) in the central bank’s October monetary policy review.

Recently, the International Monetary Fund (IMF) said that India’s economic growth is “much weaker” than expected due to corporate and environmental regulatory uncertainty and “lingering weakness” in some non-Bank financial companies.

“Again, we will have a fresh set of numbers coming up but the recent economic growth in India is much weaker than expected, mainly due to corporate and environmental regulatory uncertainty and lingering weakness in some non-Bank financial companies and risks to the outlook are tilted to the downside, as we like to say,” IMF spokesman Gerry Rice told media at a news conference.

Lending a helping hand to slow demand, consumption and investment, RBI has slashed benchmark interest rate four times consecutively since January 2019. The central bank reduced the repo (short-term lending) rate by 1.10 percentage points during the year. The current repo rate stands at 5.4 per cent with the latest 35 bps cut.

The next monetary policy review is scheduled to be held between October 1 and October 4. “So, the current economic situation is unique in India. All these years, we saw a slowdown in India because of supply-side constraints. This time, we are witnessing a genuine demand-driven slowdown…on the demand side, the two levers are either fiscal or monetary.

“Now, the point being made repeatedly is that there is clearly far more space on the monetary side than fiscal side as long as you want want to maintain yourself within FRBM (Fiscal Responsibility and Budget Management) trajectory. Space is greater on monetary side,” he said at an event here.

Recently the Finance Minister announced a slew of fiscal measures — for real estate and exports, before that she announced rollback of the enhanced surcharge imposed on foreign portfolio and domestic investors in Budget 2019-20. In between she announced a set of PSU bank mergers.

Sanyal also said there is high cost of borrowing in Indian economy and with low inflation it is also not tenable. “The government borrows at 6.5 per cent but there are large parts of the economy that are borrowing at 11.5 per cent and 12.5 per cent. So, in a country where you have 3 per cent inflation, 900 basis points real interest rates are clearly not tenable,” he said.

The Principal Economic Advisor said there are more announcements likely to boost growth and demand. He said the government has taken several measures to boost and the Finance Minister may speak again in a few days to clarify on the some of the announcements made.

“There is a whole bunch of things that that the Finance Minister just announced. There will be more. Of course, there is a Budget in few months from now where bigger and more clear vision for next few years will be unveiled,” he said.