Column: Does RBI get it? There is no credit

Fri, Nov 6 02:39 AM

Much as one would like to give kudos to Reserve Bank of India for quietly putting the focus back on liberalisation of the financial sector in its recent review of the monetary policy, its stoic silence on how to grow credit when India's growth pattern is still wavy and fragile is regretful. Just for record, India's non-farm food credit has dropped to single-digit level to 9.66% after 12 years for the year up to October 23.

RBI governor Duvvuri Subbarao has deftly shifted the debate from the need to boost economic growth to managing inflationary expectations. He is clearly more concerned about rising prices today, though everyone reckons that much of the increase in the wholesale price index is because of food items. It is not unknown either that the significantly higher consumer price inflation (CPI) also derives from rising prices of food products that have a higher weightage in the CPI.

That India's recovery needs deeper nurturing by making credit available at affordable rates did not seem to have cut much ice with RBI, despite the fact that many sources of funding available last year have disappeared. Instead, it has sought to justify the low credit offtake by citing poor demand from the industry. This argument is specious, more because banks don't want to lend. They have turned pessimists for fear of delinquencies. A clear pointer to this is their huge investment in government securities—almost 30% of deposits—compared to the statutory liquidity requirement of 25%. While larger corporates get all the money at best rates, the small & medium enterprises never make the grade.

Strategically and systematically, the central bank had started building a case for unwinding of the easy monetary stance from the beginning of this financial year. Way back in April, RBI was worried about the consumer price index that was in double digits. And then by August-end, it turned squeamish about rising prices and had said that keeping the monetary policy loose will endanger growth prospects in the medium term. The wholesale price index based inflation then stood at -0.21% for the week ended August 22.

In the second week of September, Subbarao told an international audience in Basel that India may have to reverse its easy monetary policy stance sooner than other economies. Many could have seen it coming, given that inflation had just turned positive to 0.12% for the week ended September 5, after a 13-week stay in the negative territory. Of course, nobody disputes that central banks around the world are finicky about inflation. In India, it has been no different. But during difficult times, governments and monetary authorities worldwide work in tandem to nurse the economy back to a firm recovery. In fact, the governments play a more proactive role—not to conclude that the monetary authorities are losing their independence. So, while RBI thinks that inflation is a bigger concern than growth, finance minister Pranab Mukherjee feels inflation is not a pressing area of concern as yet.

What is unique about RBI is its mandate to strive for growth as well as financial stability with the same intensity as it is to anchor inflationary expectations. The strong double-digit growth rate of industrial output in August possibly egged on the central bank to decisively signal an exit in its recent review. Subbarao hiked the statutory liquidity ratio (the portion of deposits banks have to invest in approved government securities) by 100 basis points to 25%, directed banks to increase their provisioning cover against non-performing assets to 70% by September next and also made it more expensive for the commercial real estate sector to take loans from banks.

After the robust double-digit growth in the index of industrial production (IIP) in August, the 4% growth in the infrastructure output in September has left policy-makers more circumspect about the sustainability of the recovery. As Mukherjee said on Tuesday at the Economic Editors' Conference in Delhi, India cannot afford to drop guard.

The economic stimulus has to run its full course. Fiscal deficit is indeed a cause for concern, he acknowledges, but there is no need to panic.

It is the political economy—need for creating more jobs, protecting the interests and incomes of the existing labour force and increasing household incomes—that Mukherjee is bothered about. Rightfully, the FM expressed concern about poor credit offtake to employment generating sectors—the micro, small & medium sectors and agriculture.

So, the least to expect from RBI was to exhort banks to lend more to the SMEs, the backbone of India's manufacturing sector. But it pared the credit growth target for the financial year to 18% from 20%, tacitly encouraging banks to safely lock their moneys in g-secs. It also stressed more on financial stability by asking banks to provision more towards net NPAs. The country's largest banks, State Bank of India and ICICI Bank, are already expecting RBI to review this decision.

pv.iyer@expressindia.com

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