Dr Raghuram Rajan will lay down the office of Governor, Reserve Bank of India, on September 4, 2016. It is a pity that the government has eased him out at the end of three years when he would have willingly served until September 2018 and, if nudged, until the government’s term ended in May 2019.

Anyway, let us put those events behind us. Maybe the government will surprise everybody by making an inspired choice. I certainly look forward to the announcement which is already overdue. What awaits the new Governor? To his successor, and to the Prime Minister and the government, Dr Rajan has left valuable messages.

Plain English

Central Bank governors do not speak in plain English (or French or German or Chinese)! They speak in an elliptical language leaving the listeners to make their own interpretations. Mr Alan Greenspan, a former chairman of the US Fed, once famously told the US Congress, “Gentlemen, since I’ve become a central banker, I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

Dr Rajan’s last policy statement, made on August 9, 2016, was in plain English and could have left no one in doubt. The RBI is not yet prepared to cut the policy rate. Let me cull out a few important statements from the policy:

“Since the statement of June 2016, several developments have clouded the outlook for the global economy. Across advanced economies, growth in Q2 of 2016 has been slower than anticipated, and outlook is still mixed.

Among emerging market economies, activity remains varied.

World trade remains sluggish in the first half of 2016. Most financial markets did not anticipate the Brexit vote and equities plunged worldwide, currency volatility increased and investors herded into safe havens.

Configuration of risks

(In India) the prolonged sluggishness in the capital goods sector is indicative of weak investment demand… Business confidence is also looking up in recent months, though the Reserve Bank’s survey for March 2016 suggests that capacity utilisation, seasonally adjusted, is still weak.

Retail inflation measured by the headline consumer price index (CPI) rose to a 22-month high in June, with a sharp pick-up in momentum overwhelming favourable base effects.

In the external sector, merchandise export growth moved into positive territory in June after 18 months… On the other hand, imports continued to decline, albeit at a slower pace than in recent months.

On balance, inflation projections as given in the June bi-monthly statement, i.e. of a central trajectory towards 5 per cent by March 2017 with risks tilted to the upside, are retained. [The chart gives a range of 4.8 to 6.4 per cent.]

In view of this configuration of risks, it is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action.”

There are, of course, other statements that highlight the positive indicators such as positive outlook for value-added in agriculture, pick-up in industrial orders, expansion in the services sector, moderate rise in rural wages, likely easing in food inflation, positive net portfolio inflows, and ample liquidity. Nevertheless, the message to the government is clear: The RBI is awaiting action of the government that will create space for policy action by the RBI.

Where are the triggers?

We come back, again and again, to the absence of triggers to boost the economy. In the absence of triggers, there is no demand for credit from the manufacturing sector (as admitted by many public sector bank chiefs); there is little greenfield industrial investment; there is no evidence of job creation; and there is no ‘feel’ among the people that the economy is growing at 7.6 per cent.

Who has the hand on the wheel? For example, the Minister of Coal announced that availability of coal is abundant. True, but why are coal stocks piling up leading to cutback in coal production? The Minister of Power claimed that there is no shortage of production of electricity. True, but at what price is electricity available, why are there ‘load shedding’ by distributors and ‘back down’ by power plants and, when per capita consumption is low, why is there no demand for electricity?

There are three indicators that must be tracked every month by the government. Firstly, how many stalled projects have moved forward towards COD (commercial operation date); secondly, what is the capacity utilisation at present in each industry; and, thirdly, how many new factories commenced production and how many new jobs were created?

The Governor was right when he said that he is awaiting space for policy action. What he left unsaid is also pretty clear: it is only when action is taken by the government that the RBI will be persuaded to cut the policy rate. Given this situation, I think the government is obliged to tell the nation what it intends to do on sluggish demand, stalled projects, slow credit growth, high food inflation, depressed manufacturing sector and low job creation, so that the RBI, under the next Governor and the new Monetary Policy Committee, will be persuaded to cut the policy rate. Otherwise, the blame game will continue without yielding any result.

The messenger has left a clear message and he has packed his bags. Thankfully, the potshots at the Governor have, by and large, stopped. In 20 days from today the messenger would have left and only the message will remain.

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