The Reserve Bank of India’s decision to hold the repo rate after five back-to-back cuts seems to have taken many commentators by surprise. From their reaction, it would seem that economic growth is the sole responsibility of the RBI. Can the central bank be faulted for pausing after cutting the repo rate by 135 basis points in five tranches? By not succumbing to market pressure, the RBI may have signaled that now it’s the turn of the government and the businesses to do their bit.
The government has already addressed the supply side issues by cutting corporate tax rates and offering several sector-specific concessions. Now it’s time to put more money in the hands of people by stepping up spending and boosting consumption demand. There is a need to spur the rural economy by increasing minimum wages and allocating more money through MGNREGA, self-help groups and producer companies. Instead of depending on RBI for stimulating growth, the industry and the businesses should step up investment to trigger growth.
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The need is to come out of the vicious circle to trigger a virtuous circle where one action will trigger another to speed up economic recovery.
Cutting the repo rate and transmitting it to the borrowers is just one aspect of this virtuous circle. Along with this, there should be an effort to improve infrastructure in terms of better roads, ports and housing. Also, there should be a concerted effort to boost key sectors such as mining and manufacturing.
These steps will have an immediate impact on the economy if they are rolled out simultaneously. The revision of MGNREGA wages will create rural demand for fast moving consumer products and trigger a manufacturing uptick. Mining industry will not just trigger employment, but ensure timely availability of minerals and import substitution, saving valuable foreign exchange. Higher spending on infrastructure will boost the core sectors and will create a positive atmosphere by creating wealth.
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The RBI announced another important step to enable payment banks to become small finance banks. This will correct the short-sighted policy that made payment banks just conduits of direct benefit transfer. The real financial inclusion will need a physical structure every 5 km radius and a catchment area with every adult and student have their accounts. It will ensure a complete shift from just ‘having access’ to ‘gaining access’ through these accounts. The SFB should be encouraged to open branches in shadow areas (where there is no such structure), thus transforming post offices and cooperatives into SFB. This will be a real game changer for financial inclusion, digital payment enhancement and of account holders.
What is needed is a tiered approach of micro finance institutions lending up to Rs 2 lakh, SFBs offering loans up to Rs 25 lakh, NBFCs for Rs 20 crore and above and commercial banks offering big loans to the industry. The RBI decisions not to cut repo rate further and to allow payment banks to become SFBs need to be complemented by timely policy action and huge private investments.
Dr Aruna Sharma is a New Delhi-based development economist. She is a 1982-batch Indian Administrative Service officer. She retired as steel secretary in 2018.