Cause for pause

With the central government basically abdicating the responsibility of inflation fire-fighting to RBI, there seems little alternative to a further jump in the repo rate on Thursday. This is despite a clear acknowledgment by Subir Gokarn, deputy governor of RBI, that the chief drivers of inflation — commodity prices — were outside the influence of the monetary policy. But, as agricultural reforms will not happen soon, the pass-through of the monetary measures have to be through the manufacturing sector, despite the consequences. RBI will, of course, take heart from the sustained rise in bank credit to the commercial sector, which was growing 21.3% year-on-year till the end of May. But within that, weakness is increasing, as the disaggregated sectoral data shows. The sector that has witnessed the fastest rise in credit is services, at 24% compared with 13% a year ago. Against this, the growth rate of credit to large industry has shrunk to 27%. So, overall, the rise in credit to the manufacturing sector is only 12.7%, year-on-year. Obviously the rising rates are beginning to hurt. So, more than the raise, the key indicator will be whether RBI will signal a pause. That will be the forward message which industry and the financial sector will be most interested in. How RBI words the pause will be the basis for all sectors to calculate their annual business plans.  It is rather unfortunate that the management of the short-term goals of the Indian economy has passed almost totally to RBI. The supportive environment that would have allowed RBI to pause earlier in the cycle does not exist. On three key issues, that of expenditure management, reform in the food economy and creating impetus for foreign capital to flow into the economy, New Delhi has stopped working. The government will go through with its borrowing for the year, despite the adverse implication for the rest of the economy, including the hardening of interest rates. No hard limits have been set for subsidy management in the budget. The government, as we have already said, has no clear intention to invest more in the agriculture sector and, therefore, create an incentive to cut down opposition to changes in food marketing. Finally, midway into the year, an OECD report says the tax architecture being planned under the DTC will enhance capital intensity in the labour surplus economy.

Just before the RBI governor decides on his course of action on Thursday, corporate India would have told him what they think this year will turn out for them in the first instalment of advance corporate tax on Wednesday. Will Subbarao read the tax leaves?

FE