Governor Rajan under fire for delay in shift to rate-cut mode, which the Finance Minister consider as major factor for squeeze in IIP (and manufacturing) growth, deliberately avoiding the other impact of WPI at 0%. The FM has also misunderstood the Governor's good intent to extend "Make-in-India" wish to "Make-for-India" ambition! It is time to study the disconnect between the FM and Governor to set matters right and to get better understanding on the cause and effect.
What are the reasons for growth depression in the manufacturing sector? Growth momentum is generated from pick-up in consumption demand and investment appetite to meet resultant supply capacity expansion. It is no rocket science! It is also common sense that investment (and monies) will chase opportunities when demand-push factors emerge strongly to squeeze supply capacity. When such a situation emerge, abundant system liquidity at low interest rates will set up the desired momentum to accelerate investment flow. Is this the case now? Definitely not, the FM would agree! The issues now revolve around squeeze in demand in core manufacturing sectors and absence of public sector consumption appetite; major impact from depressed infrastructure sector and poor fiscal conditions of the Government. The private consumption (in non core sectors) has come in to prevent growth collapse. It is also obvious that rate-cut is not the solution to revive infrastructure and to spur public investment and consumption. All considered, the "cure" is with the Government (and the FM) and not with the RBI (and the Governor). As said before, liquidity (and cost of funds) is not the remedy; the need is to create good opportunities for monies to chase! At this point of time, no investor see investment returns (the IRR) beyond the yield offered by Gilts or top-notch corporate debt, hence the huge appetite for Gilts, Bank deposits and low-risk corporate bonds against alternate high-risk, low-yield private/public investment/lending opportunities.
Why combination of "Make-in-India" and "Make-for-India" India relevant? The lead impact of "Make-in-India" agenda will be felt on the CAD, from higher imports for set up with couple of years lag on boosting exports. The system has also seen many export-led economies going under growth depression when external demand stay diluted. The "Make-for-India" agenda address these two concerns; substituting imported consumption with domestic production and building growth momentum from domestic consumption (and demand). Ideally, "Make-in-India" agenda should be the derivative of "Make-for-India" story, that's what the Governor wish to convey, I believe!
The way forward on rate cut and "Make-in/for-India" agenda are best to be discussed in private, as these themes are most critical (and relevant) for India growth agenda. It is prudent not to act in haste to avoid disappointment (and reversal of stance) and best to take time at strategic planning stage to build workable (and effective) tactics for swift execution!
Thinking aloud from RR perspectives!
Moses Harding
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