India is the only G-20 country where the economic situation and the policy-making establishment’s approach seem disconnected. Policy-makers in other major economies are busy. Policy-making here, like the RBI’s recent rate cuts, is happening by 50 basis points (bps). The RBI’s curious caution is being complemented by the government’s curious casualness. The central bank looked at all the current data and credible projections, and it surely knows that monetary policy has to be forward-looking, and still decided that moderate cuts in policy rates were enough. In normal circumstances, when the repo rate is 5 per cent, bank lending rates won’t be in double digits. But these are not normal circumstances. However, the RBI chose to argue that a slowing economy was making banks fearful about credit risk. Precisely — that’s why a radical monetary policy intervention is called for, so that risk perceptions and investment appetite can be altered.

Clearly, all the heavy hints dropped by various government notables are not working. One reason may be that the RBI governor is battling a powerful intellectual orthodoxy in the organisation he is supposed to be leading, and perhaps sees himself as a novice. There’s weak countervailing force to this because the government isn’t punching its full weight in forums for wider policy deliberations. The UPA decided bang in the middle of post-reforms India’s sharpest economic slowdown that it could do without a full finance minister. Then, the PM’s health-enforced absence required a super-busy foreign minister to depute as finance minister. So, we now have a situation where (a) the PM is just back at work, with a general election that will require his political attention looming and with an agenda-heavy G-20 meeting scheduled early next month; (b) the foreign minister is being kept busy with the increasingly complicated Pakistan problem and political negotiation; (c) an election code of conduct that has reduced policy options; and (d) the need for visible and audible leadership on the economy growing by the day.

... contd.