By Jayant Rao

Edited by Namitha Sadanand, Senior Editor, The Indian Economist

In the past few months, events of great importance have occurred in the Indian economy. Growth indicators such as IIP and PMI did not sound positive, but on the other hand our CAD at 1.7% of GDP and at 7.8% are encouraging .While the PM is pitching his Make in India policy, on the other hand Governor Rajan is not budging from his tight interest rate regime. There are a lot of mixed signals sent across the spectrum, which makes it difficult to gauge the timing and extent of increase in the Indian growth story.

The three basic factors in an economy that move the wheels of growth forward are :

1) The sentiment which is majorly influenced by the government with its various policy initiatives,
2)The implementation, that is the government delivering on the policy initiatives they  have announced and
3) The credit supply at a lucrative and optimum rate in the economy .

The aforementioned factors can be bucketed into two categories- the first and the second coming under the fiscal policy and the third coming under the monetary policy, which are taken care of by the government and central bank respectively.
Here’s a look at the initiatives taken and its impact on the Indian economy.

Fiscal Policy: The current government is indemnifying the damage to the Indian reputation that the previous one had incurred during its regime. Investor sentiments for India are clearly positive not only domestica globe-the bull sentiment seems to be back. The Japanese have pledged to invest $ 35 billion, and the Chinese $ 20 billion; the US and India are entering into a strategic relationship across varied areas. These commitments brought about by Modi have, no doubt, opened a new chapter for the India growth story . The government is also trying to make the Indian environment conducive for business by removing red tapism, bottlenecks and impediments to conducting business activities.Policies like Jan-Dhan yojana and Make In India will definitely contribute towards strengthening of the economy. Our finance minister is resolved on reigning in the fiscal deficit to 4.1% of the GDP . For this he has already started taking steps towards cutting down on unnecessary expenditures and reducing the subsidy bill by deregulating diesel prices.We can very well say that the government is successful in getting the ball rolling.
But it doesn’t end there , the second and the third factors are also as important. The government is yet to deliver on the second one. Now that it has created the roadmap in its first 100 days , the expectations are more as far as deliverables are concerned.
Monetary Policy: For businesses to thrive and prosper, the cost of capital should be lower than the return of investment.Looking at the current interest rate regime, the cost of capital is high, which is creating a hindrance for credit to be availed. Hence the corporate industry is asking for a policy rate cut from the RBI. But Dr.Rajan will do so, only when the inflation targets set by the RBI are met. The central bank’s main focus is on reducing inflation to 8% by Jan’2015 and 6% by 2016. A look at credit-deposit growth shows that the increase in deposit growth is much more than the increase in credit growth , an indication that the markets desperately need money at lower rates to grow. The RBI hopes that the fiscal side will work on the implementation of policies announced, reduce the fiscal deficit, deregulate the diesel prices and clean up the supply side bottlenecks which will ease inflation and consequently create sufficient room for them to cut rates.  RBI, from its point of view, is correct as even if they reduce the policy rates and the credit off takes place, it will lead to more inflation and  the growth  will be short lived and unsustainable.So they have no option but to wait and watch.

In essence, the current government has started off on the correct note by creating a positive vibe and inviting the world to invest in India, by promising a cut on red tapism and unnecessary bureaucratic impediments and an investor friendly environment. They need to now focus on the deliverables and ensure proper implementation of their policies; once this is done, inflation should  come down giving room for RBI to cut rates and review growth in the economy.

Posted by The Indian Economist | For the Curious Mind