The Union ministry of finance is perceptibly anxious about the stunted economic growth of the economy, especially when it is in the middle of an important assembly election. Its high-octane claims that the implementation of the goods and services tax (GST) would bring about a seismic shift in the way people conduct business does not seem to be coming true. It is nearly five months since the indirect tax was rolled out. In the meantime, the GST Council has brought in multiple revisions in structure and rate slabs. Yet, GST has failed to soothe prices of most essential commodities and services. The government expected GST would subdue rates of 200 essential commodities. On the contrary, rates of many essential goods have gone up. That inflation has been inching up from its seven-month low is solid proof that GST has failed to blunt prices, granted it is though that five months is not long-enough time to assess results of an economic policy. However, it is adequate to show the direction in which the economy is headed. As things stand now, it does not inspire confidence to believe that GST will be a real game changer as is claimed. The situation has left the mandarins in the finance ministry reasonably worried.
This government is already three-and-a-half years into its five-year term. The GDP growth in the previous quarter (April-June) fell to 5.7 per cent — a three-year low. If things do not perk up from here on, the Modi government will be certainly falling way short of its promise of fashioning a dynamic economy that can create jobs for millions of young Indians joining the labour force each year. The government cannot afford to boost public investment without endangering its commitment to fiscal consolidation that pushed Moody’s Investors Service earlier this month to award India its first sovereign credit rating upgrade after a gap of 14 years. Standard and Poor’s (S&P) has also stuck to its stable reading of the economy. All eyes are now on the RBI’s bimonthly monetary review meeting next week. The government desperately wants the RBI to reduce the rates to kick-start growth. The central bank in its October review did not cut rates, much against the wish of the Centre. The central bank, considering its overt discomfort with rising inflation, is likely to disappoint the government this time too. With prices of vegetables and many kitchen staples at record highs and the oil companies expected to raise fuel rates any time, the RBI is likely to hold on to its rates.
The central bank at its last meeting in October had left the repo rate unchanged at 6 per cent, flagging risks to the inflation outlook. However, the government is impatient now. It wants the RBI to cut rates in its next meeting in March, if not in December. The finance ministry should stop meddling in monetary matters. The UPA I and UPA II had done the same thing. The Monetary Policy Committee’s (MPC’s) mandate is to set interest rates to achieve a targeted 4 per cent inflation with plus or minus 2 per cent on either side, and maintain price stability in the country, while keeping economic growth in mind. The panel should be allowed to do its job untrammelled. The GDP growth inched up to 6.3 per cent in the September quarter. The figures though not very encouraging is not discouraging either. India’s economic growth had slowed to 5.7 per cent in the June quarter. The GDP numbers will partly take the pressure off the RBI’s shoulders, for the time being, to cut policy rates. It may well pull on till March next, by which time the December GDP figures would have come out to show a clear picture of the health of the economy.