And the pressure had come from many quarters. The finance ministry wanted sops for the capital market, which would make the Rs 5,000 crore disinvestment target look feasible again. The industry ministry wanted instant money at low rates so that industry could start making goods again and get on with investing and stop making them (the ministry) look bad. Visualise the tourism minister boasting in a cabinet meeting: So my industry is growing at 25 per cent this year. How did you get on, Maran? and the industry minister blushing and making a note to tell those RBI fellows to make at least a 3 per cent cut in CRR and forward them along with other complaints from firms about the lack of money and its high cost. The prime minister, meanwhile, was getting carried away by whiffs of electoral success in UP. Struggling with Hindi,he decided that if he couldnt speak the language, he would at least make sure the subject matter deserved a translation. So he waxed eloquent about helping small scale industry, higher price for wheat, more HLL-sponsored haat or whatever, maybe even hinting at a loan mela.
The export lobby was also there shouting slogans outside the RBI that, as they were not making pots of money due to rupee volatility, they wanted cheaper working capital at dollar rates of interest. The exporters protests and demonstrations took up so much time that export growth actually declined and people thought there really was a problem. Even the IMF-World Bank team visiting last week had its agenda and egged him on to fulfil some more of the pre-conditions for full-convertibility, so then it could announce another job well done to the rest of its members.
So the doctor sat to write, he had to make sure his prescriptions had lots of feel-good drugs which would bring cheer to all in the government, the markets, exporters and rest of the corporate sector.
So what compromises did he make? He didnt cut the CRR by 3 percentage points, but only by 2, and that too over a three-month period. He has stated explicitly that the January cuts would depend on the price and monetary situation prevailing then. So he hasnt actually fully opened the monetary expansion taps, though his commitment should give all the right signals. While doing so, he has also pointed out that the fall in industrial growth was due to very poor growth in infrastructure sectors like power and not all due to shortage of funds.
By allowing banks to lend their FCNR deposits in dollar loans to Indian firms he has taken care of the exporters demand for internationally competitive working capital financing. After this, if exports do not pick up, we have to start examining our merchandise quality. The policy also helps him reduce some mandatory demand in the dollar-rupee forward market (banks earlier had to convert dollar deposits . And thatll be the real test of his Diwali prescriptions. [