RBI's modest rate cut may not revive growth

The anaemic 25 basis points cut in the repo rate (that at which the RBI lends to commercial banks) is unlikely to give the required boost to growth which dropped precipitously to 5.8 per cent in the last quarter from 6.8 per cent in the earlier quarter. While the monetary policy announced on Thursday by RBI governor Shaktikanta Das repeatedly assured there would be enough liquidity in the system, there was no mention of Non-Banking Financial Companies (NBFCs) specifically in the policy. The assurance thankfully came in the post-policy press conference. However, whether NBFCs, particularly the not-so-strong ones, will have access to this liquidity pumped into the system which is around over Rs 2 lakh crores, is a matter of speculation. Both the central banker and the government realise that NBFCs are the backbone of finance for small and medium enterprises and provide employment, which is the need of the hour. The unemployment rate is at a 45-year high. NBFCs account for 23 per cent of total loans in 2019 compared to 13 per cent in 2012 and the share of banks declined to 77 per cent from 87 per cent in the same period. So the importance of NBFCs cannot be underestimated.

The RBI’s policy must be lauded for giving a much needed boost to affordable housing, though this would be concomitant on the banks passing on the cumulative 75 basis point cut by way of cheaper loans. Their past performance has been patchy with just 21 basis points being passed on, but with RBI now monitoring the situation, the lacunae should be resolved in the coming months.

The limitations of the monetary policy will, however, be made up by the two panels created by Prime Minister Narendra Modi to push both growth and job creation. Mr Modi had promised creation of two crore jobs a year in his first term and lobbied for a second term to complete his promise.

The Union Budget scheduled to be presented on July 5 will have to support the affordable housing sector by cutting taxes. Housing has a snowballing effect and leads to boosting other sectors like cement, steel and household accessories. The Goods and Services Tax slabs also need to be simplified further.

Interestingly, the director of the National Institute of Public Finance and Policy has pointed out that growth in India is predicated on catering to the consumption of just 15 per cent of the population. Auto and ACs are used at benchmarks of growth. Significantly, Mr Modi has gone beyond this by targeting sections of the population that need special attention though his various yojanas, but he needs to institutionalise this on an all-India scale. The challenge is to go beyond the needs of the 15 per cent and provide among other essentials, affordable clothing, food, nutrition, healthcare and education.