Expert Zone
Straight from the Specialists
Why is RBI chief Subbarao so cynical?
(Any opinions expressed here are those of the author and not of Thomson Reuters)
In its policy review on May 3, the Reserve Bank of India (RBI) did bring down the repo rate by 25 basis points but it also presented a gloomy outlook on growth and inflation which left the stock markets cold. The Sensex, which had surged in anticipation, fell 160 points. What makes the RBI so negative when even rating agencies are inclined to accept the emergence of green shoots?
RBI Governor Duvvuri Subbarao has himself spelled out the risks. “Upside risks are still significant in view of sectoral demand supply imbalances, the ongoing correction in administered prices and pressures stemming from increases in minimum support prices,” he said. Is Subbarao’s risk assessment genuine or has it been exaggerated to put the government under pressure?
Sectoral imbalances may take time to fully correct but if as anticipated by the India Meteorological Department the monsoon this year is normal, the supply deficit will be considerably reduced. It is quite likely the correction in administered prices may also be downwards rather than upwards with international commodity prices, including that of crude oil, moving south.
But there is certainly the risk of an increase in minimum support price, which has been the cause of inflation creeping upwards. The increase in food grain support prices each year has become a source of inflation with the potential to spread throughout the economy. First, there is the direct effect. A 5 percent increase in prices can lead to inflation going up by 0.75 percent. Second, there is the derived effect. The increase in support prices is reflected in the cost of living and consequently wages, raising the cost of manufacture to push up inflation by 1.3 percent. The direct and indirect effect of a 5 percent increase in support prices adds 2 percent to inflation. This is a genuine risk but not too significant.
Need to bring repo rate in line with inflation
(Any opinions expressed here are those of the author and not of Thomson Reuters)
For nearly three years now, the Reserve Bank of India (RBI) monetary policy has had a single target. The presumption is that only when inflation is below the tolerance limit can the interest rate be made normal.
The last time the repo rate was reduced was on March 19 when it was cut by 0.25 percent, a change understandably ignored by commercial banks and other financial institutions. With the repo rate at 7.5 percent and inflation down to 5.9 percent, the market expects the RBI to cut the repo rate further at its next policy review on May 3.
Gold not a good investment for now
(Any opinions expressed here are those of the author and not of Thomson Reuters)
Since November, the price of gold has been unstable but in April, its decline was precipitated. What is surprising is not the fall itself but its speed. In just two sessions, gold prices dropped 13 percent in the steepest fall in 33 years. It wasn’t gold alone that got caught in the bear grip. Prices of other commodities such as silver, crude oil, copper and so on also declined, but not as sharply.
Pitfalls of the food security bill
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The food security bill will be introduced in the current budget session of parliament, more because of its populist appeal than any economic urgency. Even when the bill was discussed by the Cabinet, Finance Minister P. Chidambaram and Agriculture Minister Sharad Pawar reportedly had reservations. They had valid reasons.
Subsidized food distribution is nothing new. Already 400 million people avail of it from over 500,000 fair price shops. What the bill intends is to widen the scope of the present scheme and cover two-thirds of the population with five kg of grain per beneficiary at nominal rates.
The battle for patent protection
(Any opinions expressed here are those of the author and not necessarily of Reuters)
The Supreme Court verdict on Glivec brought to an end the battle by Swiss drugmaker Novartis to exclusively market the cancer medicine. In doing so, the bench enunciated a principle to justify a patent only by its intrinsic worth of innovation.
The stock market’s delayed response to Budget 2013
(Any opinions expressed here are those of the author and not of Reuters)
Finance Minister P. Chidambaram tried to humour the market in his budget by cutting the Securities Transaction Tax (STT) which had been one of its sore points. But the market was not amused. The Sensex continued to slide, indifferent to the budget which was presented with a lot of expectations.
This appears to be rather strange because the budget was well received by the industry, in spite of the increase in surcharge from 5 to 10 percent. It was possibly the realization that the finance minister lived up to his promise of cutting fiscal deficit to 4.8 percent which created an infectious confidence in growth revival.
Risk factors in Budget 2013
(Any opinions expressed here are those of the author and not of Reuters)
Finance Minister P. Chidambaram has apparently done the impossible. He has brought down the fiscal deficit in the current year from the budgeted 5.3 percent to 5.2 percent in spite of the fall in revenues. What’s more, the deficit was further slashed to 4.8 percent in the 2013/14 budget. Is that realistic?
Look at the expenditure. In the current year, subsidies on food, petroleum products and fertilizer were up by 676 billion rupees or 36 percent. These are precisely the expenditures the minister had to curtail, though he did make an effort to do that too late in the day. With the jump in non-Plan expenditure, the fiscal deficit could be brought down only by cutting Plan expenditure.
Budget 2013 should trim expenditure
(Any opinions expressed here are those of the author, and not necessarily of Reuters)
Finance Minister P. Chidambaram is only too aware of the damage done by the last budget and has to an extent repaired it to unleash investment. The next budget should confirm his commitment to growth.
The year the Indian economy stalled
(Any opinions expressed here are those of the author, and not those of Thomson Reuters)
The year 2012 has seen the worst an emerging market economy can tolerate. Had the government been a little less reticent and more proactive, growth would not have dropped this low in spite of the economy being mauled by inflation. Other emerging market economies did exactly that.
The burden of India’s cash transfer scheme
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The government’s cash transfer scheme (CTS) has been accepted by economists as the most efficient method of delivering subsidies to the poor. This became possible with the identification of the poor after the introduction of “Aadhaar” or unique identity scheme. The scheme is going to be implemented from the beginning of 2013.
