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Focus on reforms rather than rate cut
Fri, 1 Feb Pre-Open

The Reserve Bank of India (RBI) has finally blinked. Expectedly, India Inc, markets and analysts have given a thumbs up to the RBI for lowering its benchmark repo rate by 25 basis points in its January policy review, and cutting the cash reserve ratio (CRR) by another 25 bps. In fact, given the policy guidance from the central bank, analysts expect RBI to effect another 25 basis points cut in the repo rate, come March.

A rate cut, theoretically, will help revive consumption and investment demand. But for growth, it has been reasoned enough that a rate cut alone will not do much. India needs reforms at various levels that will make growth lot more sustainable and also help boost exports. This will also allow RBI to focus on inflation and reduce the burden with respect to anchoring growth and managing currency.

Although the government has initiated a host of market interventions, such as MGNREGA and microfinance for betterment of the poor, the truth is, much of the cash transfers do not reach them, because of corruption and the high administrative cost of implementing these social welfare programmes. To plug leakages in the system, an important reform push is direct cash transfer scheme. Direct cash transfer will initially focus on scholarships and pensions but later will be used for subsidies on cooking gas and payouts for MGNREGA.

The implementation of the FDI in retail and issuing of new bank licenses will also help attract new investment. The government proposed to bring in reforms in insurance and pension sector. The insurance Bill proposes to increase the FDI cap to 49%. The government is considering a cut in the base price of another round of spectrum auctions in March 2013, which should bring in more money to the exchequer and give telecom firms more radio waves.

The debate on returning to a sustainable higher rate of growth, therefore, needs to broaden. While interest rate cuts by themselves do not immediately translate into investments, they bring down corporate expenses and allow them room to plan expansions and investments, but it is still a necessary but not a sufficient condition for attaining growth and prosperity.

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