Source: CEIC data
What is also important is that RBI believes that the economic recovery would be shallower than what the government officials believe. I mentioned here why the optimistic assumptions behind the growth estimate put forward by the PMEAC (6.4% growth in GEP for FY14 as against RBI’s expectation of 5.7%) fails to stand scrutiny. Clearly RBI is worried about slower growth but they rightly believe that the government should be able to walk the talk rather than only talk while expecting RBI to shoulder all the responsibility. Monetary policy is essentially a signaling mechanism and as I explained here that despite a 1.25% cut in repo rate, 1.5% cut is CRR and 1% cut is SLR since March 2012, lending rates have hardly budged clearly shows that the problem lie elsewhere. Clearly, the transmission mechanism has weakened. The only way this channel can be effective would be when the confidence on the economy is back. And, for this, the government has to act. Question is, given the political reality of a weak & corruption tainted government and advancing general election, can the government do anything meaningful? Don’t bet on that. India will be well served if indeed we have an early election and a fresh government takes guard sooner rather than later.