First they conveniently lost their voice; then they miraculously got it back. But now that the pundits of India’s economic establishment are talking again, all investors hear is discord. The biggest casualty of the war of words between the finance ministry in New Delhi and the central bank in Mumbai is India Inc. Without clarity on where policymakers want the cost of capital to be, reasons for highly indebted companies to restart work on mothballed projects, or dream up new ones, are being drowned by doubts about profitability. The battle of the mandarins has its origin in the Nov. 8 demonetization. The ban on 500- and 1,000-rupee notes removed 86 percent of the currency in circulation from a cash-dependent economy. It also made officials wary of doing or saying anything that would amount to questioning the weird economics of the move.
Gadfly was surprised when, amid an extreme cash crunch in December, the Reserve Bank of India didn’t cut its policy rate by even a quarter percentage point. At the time, though, Arvind Subramanian, the chief economic adviser in New Delhi, described the non-action as a “brilliant call.” Then last week, when the RBI again stood pat, the same official protested loudly, saying the economy had decelerated from last July, and substantial monetary policy easing was warranted because inflation-adjusted interest rates were too high, corporate and bank balance sheets too weak, and the investment impulse too anemic.
While GDP showed evidence of a protracted slowdown in the March quarter, much of what Subramanian now says held true even before that report. For instance, a four-year drought in private-sector investment is visible in corporate data.
A Gadfly analysis of capital expenditure by India’s top 100 companies by market capitalization shows that it would be a lot worse but for Reliance Industries Ltd.’s spending spree in recent years, including the $30 billion it invested in a new telecom network.
Oddly, the RBI refuses to wake up even now. Inflation could dip below the lower end of the monetary authority’s target range of 2 to 6 percent this month, according to Bloomberg Intelligence economist Abhishek Gupta. Deflate the 10-year government bond yield by 2 percent, and the real risk-free rate works out at 4.5 percent. Who would put up new factories at such a cost?
More will update soon!!
