RBI left the policy rate unchanged on Tuesday at 7.0% (reverse repo) and at 8.0% (repo) unchanged. CRR was left at 4.0% No surprises there.

Niranjan Rajadhyaksha writes correctly that India may not be done with the rate tightening cycle. Inflation could come down meaningfully only if private investment revived. On that, he recalls the scepticism expressed by a Credit Suisse Research Report published on March 19:

It is still too early to bet on such a recovery in the investment cycle given the ongoing policy uncertainty. A recent note by investment bank Credit Suisse argues against the consensus view that elections can revive the investment cycle: “A fourth of projects are stuck with the central government, and two-thirds of these are in power and steel, both wracked with massive overcapacity; thermal power utilization is at two-decade lows. Only state governments can revive power demand. Even elsewhere (roads, railways, etc.), solutions will take years.” [Link]

I just went through that report. It is a fantastic compendium of challenges that any new government would face and where the responsibility for action lies. Statistics on the absence of primary capital issuance, bank and NPA, the stalled improvement in A, T&D losses in the power sector and the identification of issues in the power sector are very impressive and useful.

In fact, in this situation, capital market buoyancy could prove to be more of a hindrance than help.

One quibble I have with that is that the report might be missing the wood for the trees. The authors seem to be sceptical about what a new – even with a decisive majority – government could do, given the specificity of issues faced – State highways, State electricity boards and their reluctance to revise tariffs, etc.

Even with fixing only the 20% or 30% of the issues (new projects stalled at the Centre, National Highways under the Centre, Railways) that are fixable by the Centre, it is entirely possible that a different filip is given to decision-making at all levels, including State governments. Contagion works both ways. Then, a conference of State CMs and FMs might help too.

It is clear that the outgoing UPA government is leaving India in a formidable mess. That has been documented already by many and commented upon, in these pages. It will take a lot of persistent, focused effort. But, better start somewhere and hope the multiplier effect catches on in the rest of the country.

[While ‘Pat RBI’ might be a reference to the monetary policy decision on Tuesday (April 1), the RBI deserves to be patted for the award of bank licenses to non-corporations and for the interview that the Governor gave to the Business Standard in which he commented on the role and importance of foreign exchange reserves in the second-best world that we live in, thanks to the monetary and other policies of the US.]


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