The recently published third quarterly report on GDP growth is a setback for the macroeconomic management in the country. On government’s behalf, a low economic growth means low tax revenue in the coming periods. So, there is more urgency this time on the part of the government to ensure macroeconomic recovery by cooling the interest rate. For this, there is high chance that the Finance Ministry may give strong message to the RBI to cut interest rate. Already the finance ministry is angry about the RBI’s hard monetary policy stance.
The RBI on its part during the last couple of weeks was discovering new reasons like anticipated imported inflation and manufacturing inflation to continue the present dear money policy. Now with declining industrial growth rate in the economy, the central bank is on the back foot. It cannot continue its blind game of hard interest rate to make a shadow fight against inflation. Though the RBI may not be acknowledging its contribution in destroying growth, it may remain voiceless against a government forced interest cut in the coming weeks.
The below par performance, in an emerging market economy like India, where demand and macroeconomic signals are driven by domestic economy, indicate that the present low growth rate is an instance of macroeconomic policy failure. Continuation of high interest rate in the pretext of inflation control has cost the economy dear.
RBI governor himself during the last Bancon summit has mentioned that monetary policy’s effect on countering inflation is doubtful. Finance Minister Pranab Mukherjee during the Delhi economic enclave in December advocated for the invention of new remedies to tackle inflation and slowdown simultaneously because of the failure of present monetary policy practices.
The RBI is not in a position to understand the physiology of an emerging market economy. It is proved that in the growing Indian economy, high interest rate reduces growth more, than reducing inflation. High interest rate always is a tax on economic growth. The welfare loss of hard interest rate is just revealed in the declined GDP trend for the third quarter. Hence, the central bank should stop its fake game with hard interest rates; otherwise, the people and the economy may be paying the penalty for the mistake they haven’t committed.