Voter fears realistic! RBI warns belt tightening

The definition of “vikas” apparently changes as UP goes to polls, hard-pressed voters harp on myriad problems as poll issues, including junking of ten-year-old tractors, scarce jobs, high prices, low farm MSP and even interest rates.
Interestingly enough as polling begins RBI almost agreeing to the rising prices and other uncertainties at its Monetary Policy Committee (MPC) lowers growth forecasts to 7.8 percent in 2022-23, against finance minister’s 8 to 8.5 percent in the bi-monthly Monetary Policy meeting. A belt-tightening forecast! It has kept the interest rates unchanged at a low of 4 percent repo rate, RBI lending rate to banks, and 3.5 percent reverse repo rate, at which RBI borrows from banks.
Former chief economic advisor Kaushik Basu notes that growth has been decelerating. It was 8.2 percent in 2016-17; 7.2 percent 2017-18; 4.2 percent 2018-19; and minus 7.3 percent 2020-21, each year growing less, a first since 1947.
The MPC presumes retail price inflation this year to be at 4.5 percent but cautions about hardening of global crude prices on inflation. Overall it has retained its inflation projection at 5.3 percent and with closing at 5.7 percent by March on account of unfavourable base effects. However, it ignores 13 plus percent of wholesale inflation. The US agrees to one peercent rate rise. The RBI too could have incentivised deposits and ensure better banking health. The voters are not bothered about the nitty gritty but changed their perception of development – vikas- to mean whosoever they are voting would help them grow. Almost uniformly the voters in UP say that they are voting for vikas and quizzed further they say that they are voting for “our own vikas” and name an opposition SP-RLD candidate. For the other voter it means following the call of Yogi Adityanath and prime minister Narendra Modi. The vikas itself has changed its political candour.
Though it signals a change, it is to be seen how the incumbent BJP fares. The BJP as per the new manifesto is no more contesting the poll on doubling of farmers’ income, announced in 2017 or ensuring MSP to all, demand that the agitating farmers had harped on. But people also are voting for temples, and communal issues though agree to be hit by rising prices.
The contrary lines are reflecting in the lone MPC dissenting voice of Prof Jayanth R Varma. He had disagreed with the MPC resolution on August 20, 2021saying, “By creating the erroneous perception that the MPC is no longer concerned about inflation and is focused exclusively on growth, the MPC may be inadvertently aggravating the risk that inflationary expectations will be dis-anchored. In that scenario, rising risk premia could cause long-term rates to rise”.
The voters may not have read it but with their practical intuition seem to agree to the perception. The mood for change is there for a better living condition. Even the main MPC discourse does not belie the perception of Varma. Governor Shaktikant Das says that next year’s Centre’s borrowings would not be as high as projected in the budget. It means shrinkage of borrowings, deposits, uncertain expenses and growth. It is a bit eerie.
Consumption is not rising. That seems to be the concern of the voters, RBI and the government alike. The voters realise that economy would be shaky whatever the official rhetoric.
The BJP had overwhelmingly benefitted in UP riding on high expectation in 2017. The BJP manifesto speaks of MSP but does not guarantee, and repeats payment to cane growers in 14 days as does SP in 15 days. One interesting aspect is that in the budget minorities have been given priority in allotment of PM Awas Yojana, free food doles and increase in minority affairs allocation to Rs 5,000 crore, Rs 674 crore more than the revised estimates of Rs 4346 crore. The minority youth get Rs 2431 crore for scholarships and skill development. And most interestingly minorities have been given Rs 10 crore for containing population decline despite many harping on its unusual increases. These issues are being propagated by the Rashtriya Muslim Morcha close interactions with minority religious groups.
But this does not give much of reprieve to the common man. Governor Das says that rising inflation would continue to peak till the second half of 2022-23 “within the tolerance band of RBI providing room for policy to remain accommodative”.
Overall, the MPC notes loss in momentum of near-term growth even as global factors turn adverse. It assesses that owing to Ukraine-Russia conflict, Iran-US qualm, fluid Afghanistan and uncertain Middle East the economic situation may deteriorate. In such circumstances, expecting improvement in domestic growth drivers is bit optimistic. These have been the concern for lowering growth to 7.8 percent. It expects a very high growth in the first quarter and then gradually tapering off to 4.5 percent in the last quarter of 2022-23, according to Das.
Though Indian voters need not understand the phenomenon emerging in the distant West, it can hit India hard. Considering it, the MPC has concern over stagnant private consumption, which has yet to touch the pre-pandemic level.
The global problem may hit India harder in tune possibly with the pessimistic Indian voters. The World Bank warns of fragile economy infested with daunting challenges. The world growth may be hit by the difficult situation in the US. Despite tomtomming of high growth, the US suffers from the China syndrome. China has bought none of the $ 200 billion it promised from the US under ‘phase-I’ trade deal. It can lead US to choppy regime impacting global economy. A global inflation and unstable US economy can create turbulence. Everything is getting expensive in the US.
The persistent increase in international commodity prices, surge in volatility of global financial markets and global supply bottlenecks can exacerbate risks to the outlook, says Das. Yes, Chinese trade moves in Indian subcontinent might also cause difficulty.
Das says still India can recover with buoyant rabi crop, robust exports, liquidity conditions improving credit offtake and continued push on capital expenses and infrastructure. The hope is a bit too high and the MPC cautions are sharper than any voter can expect. The unsaid is grim and 2022-23 as per the MPC may not be as bright as it is trying to be projected. Belt tightening seems imminent.

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