Life After RBI's "No Rate Cut"

So RBI didn't cut rates yesterday and people all around were disappointed. It is not just people related to stockmarkets or corporates but even people like existing and new home loan and car loan borrowers. I don't blame people for expecting a rate cut very badly. When you are part of an economy that has been growing so fast, it is natural for people to extrapolate where they can reach if they continue to grow at the same rate. And then not to be able to do so can be a difficult reality to accept. My guess is that RBI in its Hyderabad brainstorming where they made plans on how to tackle an European contagion after a possible disorderly exit of Greece, had planned for many scenarios. By yesterday morning it was too clear from Greek election results that there was going to be no disorderly exit of Greece from the Euro which had for the time being, spared the world some serious pain.

RBI doesn't really have too much of headroom. For all its tinkering of rates, it has not been able to do too much on its number one objective: inflation control. And how can it be effective? Monetary policy has to work in tandem with fiscal policy and normal policy implementation. I was interacting with a very senior and now retired FinMin official yesterday after a radio show that I moderated. He told me what we all know. The bureaucrats have stopped taking decisions and not acting on files. As I see it, RBI is saving its limited blessings for any nasty surprises that may spring from Europe in the future. Although the Greek mess, after the election doesn't look as menacing as some people have thought, it is the larger economies of Spain and Italy whose lack of access to capital markets in the future is what may create more headaches for all across the globe. In this backdrop, can people expect anything positive in the days to come? Well, I will just point to my last post. I continue to believe that there will be a renewed reforms burst during August-November 2012 just after the Presidential elections. Of course, Pranab Mukherji needs to win that election. I suspect that there will be some serious progress made in Direct Taxes Code and Goods and Services Tax areas along with pensions reform. These are areas where the major opposition party, the BJP, has chaired Parliamentary Committees and made recommendations in favour of reform. Their party persons seem to be quietly resurrecting DTC and GST.  We can even have progress on  FDI in aviation. If the government can get an FDI hike in insurance to 49 per cent, it will be a bonus. Thanks to a higher base effect inflation figures may not look that disturbing.. Is this what I want to see happen or is this more likely to happen in my view? I think I will emphasise on the latter.

Reforms Burst during August-November 2012?

Let me begin by saying how proud I feel on hearing that the government has contingency plans in case of more global madness if Greece exits the EU. Wow! Something is working in the government at last! But such plans can at best contain damage from the contagion that will follow and can not insulate India. It is not the Greek exit that will matter so much but the sentiment of panic that will spread across the globe that will be the greatest threat to all countries. Stockmarkets, banks, every economic activity that is bound to be affected. Lenders will have even lesser confidence in weaker European economies like Spain, Portugal and Italy and their access to capital markets will effectively get denied thanks to risk premiums demanded, something that is already happening with Spain.

Back at home, the Congress party has asked the Government  to pull up its socks. Somebody needs to tell these wise people that in the last six months no effort has worked. Haven't they heard of Newton's first law of motion which talks of bodies being in permanent state of inertia or motion unless acted upon? Once you go into a slumber it is difficult to get out, especially when your allies and the opposition want to ensure that you end up doing nothing. So does this mean that this will continue for the next two years till fresh elections happen? I am talking aboit a lack of reforms that is impacting the economy big time. Let me say what I think might happen till 2012-end from now on.

Once the  Presidential elections get over in July, you can expect a short reforms burst during August- December 2012. Government wants to do it badly. In December, many states go to the poll. This probably the last time the UPA II will be able to reform anything. What could happen during this period? Well, with the support of Samajwadi Party, government is likely to raise diesel prices somewhat. This will not be too difficult. Any hike will help. The government can raise Rs 4 and then roll it back to Rs 2 under pressure from official and unofficial allies. We now have a rich history of rollback starting from the time of Yashwant Sinha,  finance minister during the NDA regime. Second is likely to be the Pension Bill as it can bring in large amount of long-term foreign money. BJP supports the legislation and the Parliamentary Standing Committee had its own Yashwant Sinha chairing it. With some more tinkering TMC might be pacified. A 26 per cent foreign stake is not a bad start. It will bring some more dollars. Then, FDI in civil aviation could open up. the whole sector badly needs it. What else? Well, my hunch takes me only this far and then we shouldn't be too greedy, should we? From 2013 onwards, you can expect little on the reform front with all focus on being re-elected. I don't expect any of the principal political parties to be come out entirely happy with the year-end elections. Then, that's a topic for another day.

P.S By the way, Nouriel Roubini, "Dr Doom" does have many nice things to predict in 2013. A google search will help in reaching videos and articles. http://www.roubini.com/analysis/174887.php. All the stuff got uploaded yesterday