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Boosting growth: Slow rate cuts from RBI & government measures needed

Sugata Ghosh, ET Bureau Jun 4, 2012, 04.09AM IST

Every aircraft has a stall speed - the absolute minimum below which it fails to fly and drops like a stone. Countries, too, some economists believe, have a stall rate of growth that pushes the economy to the brink of a downward spiral. For the US, this is said to be somewhere around 1%, a number distilled from 60 years of data. No one knows the stall threshold for India; or, whether there is one, and whether the number is different from what it could have been a decade ago.

As old data don't exist and new data are difficult to trust, you look around for distress signs like a pop economist. There is some pattern that emerges as everyone has a story to tell. The point is, how bad does it look?

Growth, if you believe the official numbers, is down 4% in one year, to 5.3% in the last quarter from 9.2% in the year-ago period. A drop as dramatic as this will leave even the most robust economy badly bruised. One can question, of course, the number: was India really growing at 9.2% a year back when the world was in the midst of a serious slowdown?

Well, this is the revised number and, therefore, more trustworthy than the earlier growth figure of 7.8%. The decline looks a little less scary if you go by a 7.8% growth in the Jan-Mar quarter of last year. Against a lower base, the latest growth number would have been 6% (and not 5.3%). A drop from 7.8% to 6% is less shocking, than a fall from 9.2% to 5.3%.

The truth is that if growth numbers for the next two quarters turn out to be equally hopeless, it may be impossible to avert a sovereign downgrade.

It's difficult to believe that New Delhi doesn't understand what everyone can. Aren't politicians smarter than us? They could have displayed a bit of their opportunistic trait: a few reassuring measures could have been timed with the government's completion of three years; this could have been followed up with a few more announcements on the day the 5.3% number hit the market.

What's next? The focus is on RBI. Recently, the prime minister had a quiet chat with Governor Subbarao, perhaps trying to convince him to cut rates. Mr Subbarao can be pleasantly stubborn and there are fears he may try to resist a cut. A year away from retirement, he does not want to be remembered as the RBI governor who let inflation slip out of hand.

May be the economist PM has tried to explain it's time to give growth a chance. We will soon find out. The best possible scenario: RBI begins to cut rates slowly and promises to cut more, and the government, too, wakes up from its slumber.

The worst that can happen is RBI goes on a rate cut spree and the government does nothing. A mountain of easy money that a nervous business doesn't know how to use will sow the seeds of a bigger disaster three years later.