RBI Governor Spoke Of Policy Stability, But It’s The Govt That Needs To Do It

The incoming governor of India's central bank the Reserve Bank of India (RBI) Sanjay Malhotra unwittingly showed that he is only one day old in his new position as he addressed the media at the RBI headquarters in Mumbai on Wednesday.

He was careful not to say anything that could be construed as a forward looking policy statement and rock the markets in coming days. Malhotra was even more wise in avoiding a question and answer session with the media that had gathered, itching to ask pointed questions including on cutting interest rates.

Interestingly, he spoke of policy stability and stability in general several times. While that applies to the RBI in general, it would actually apply in specific to his previous job at the Ministry of Finance where he was revenue secretary.

It is likely that as someone who learned about his appointment as RBI governor only a couple of days before the public announcement Malhotra focused more on stability in economic policy than on monetary policy.

RBI’s Policies Too Stable

If anything, RBI’s monetary policy has been too stable. Interest rates have been locked for 11 consecutive monetary policies while most major central banks in the world have cut rates in recent months and quite sharply at that.

India need not follow the same global path but this time around expectations were high because economic growth had slowed sharply to 5.4% in the previous quarter against RBI’s projection of 7%.

Remember the rumor mills have been buzzing with the somewhat unlikely suggestion that one reason outgoing governor Shaktikanta Das did not get an extension after a six-year term was because he did not lower interest rates.

The Grouse About Economic Policies

On the contrary, when it comes to stability, in all my conversations with tax experts and businesses they have expressed their biggest grouse to be the lack of stability on policies. Tax is a classic example and lets take the most recent cases.

Last week, it emerged that the government was looking at raising goods and service tax on a wide variety of products including ready made garments to between 18 and 28%.

The Clothing Manufacturers Association of India erupted in protest saying that not only would such a move benefit those who don’t pay tax or encourage others not to but also lead to 100,000 jobs being lost because of the jump in prices.

That may be a trifle dramatic but there is no denying that the tax slab suggestion came out of the blue for the industry.

In August 2023, the government said it was going to license imports of laptops and tablets. Following a severe backlash, it flipped and flopped, backpedalled several steps and finally said a few months later it would not impose import restrictions.

Companies like Apple and HP heaved sighs of relief because they could continue to import laptops. That sword continues to hang over the industry though and could fall again since the government would like these laptops being made in India.

When it comes to taxes, both direct and indirect, the list of grievances is so long that it will require a year long special series of columns just to address them. It should suffice to say that on taxes and overall policy, India has not been able to deliver stability that investors, whether domestic or international, press for.

In one of his few public appearances ahead of Monday’s announcement, Malhotra told tax officials to keep economic growth in mind and avoid saddling businesses with overly large tax demands.

“Revenue comes in only when there is some income,” he told officers at the Directorate of Revenue Intelligence, according to local media reports. “Therefore, we have to be very cautious so that we do not, as they say, kill the golden goose.”

The Union Budget 2025 is expected to see, among other things, an attempt at reducing the sheer onerousness of the current Income Tax Act. Work is on for this and suggestions have been taken for several months now.

While the RBI has welcomed its new governor in the form of the self professed technology oriented Sanjay Malhotra, the Ministry of Finance also has a somewhat sudden hole which will not be easy to fill, as Business Standard editorial director Ashok K Bhattacharya has argued on The Core Report on Wednesday.

Right now, the government needs more stability of economic policy and the RBI needs less stability of monetary policy, at least in the context of interest rates.