RBI Policy Takeaway: Economy in Stress, So is Govt Plan to Divest LIC

Saquib Rais for BeyondHeadlines

The RBI’s rate-setting panel on Thursday kept the key policy rate unchanged. It also maintained the accommodative stance for the monetary policies going forward. The two decisions have now confirmed that the economy is moving towards stagflation, a term used for high inflation and low growth. If this phase continues, the government’s ambitious plan to divest its stake in LIC may be jeopardised.

In its last bi-monthly policy review of FY20, RBI Governor Shaktikanta Das -headed Monetary Policy Committee said the economy continues to be weak and the output gap remains negative.

It also expects the economy to grow at 6 per cent in 2020-21. This is the lower target of the Economic Survey’s 6-6.5 per cent growth projection for 2020-21.

For the initial public offering of LIC to be successful, the business environment in the country has to be robust as the stake dilution will require huge money from investors. The IPO will suck major liquidity from the already liquidity-crunch economy.

Life Insurance Corporation of India is estimated to have an asset under management of whopping Rs 30-32 lakh crore, while its valuation is pegged at Rs 8-10 lakh crore. So, when such a huge company is listed on the stock market, it will need big institutional investors who are ready to invest.

Since the time Das has taken over as the governor of the RBI, the MPC has been tilted towards cutting rates, a move that the finance ministry always wanted. Interestingly, in the first policy of Das as the governor of the central bank, MPC surprised the market by cutting the rate and suddenly changed the policy stance from ‘calibrated tightening’ to ‘accommodative’, a rare move. Das was earlier the Economic Affairs Secretary in the finance ministry.

Now, when the inflation is high, even Das-headed MPC couldn’t cut-rate, thus no boost to the growth for now as containing price rise has become even more important.

With the coronavirus outbreak, global businesses are unlikely to see robust growth in the short run. Moreover, the businesses are being reluctant to put money in India because of political uncertainty due to the ongoing anti-CAA and anti-NRC protests.

Also, this year’s Kharif and late-Kharif crops had got ruined because of floods. This will not let the food inflation to be lower significantly until the new crop enters the market.

The RBI on Thursday also anticipated inflation to remain elevated in the short run and said overall inflation outlook looks “highly uncertain”.

It also just nudges towards the fact that the RBI is unlikely to go for rate cuts in the next few quarters, thus no push to economic growth.

So, it is highly unlikely that the LIC plan is meterialised if the economic condition does not improve. So, the economy needs to get moving so that overall business sentiment improves and the government requires to unleash more reforms to boost growth while keeping inflation under check.

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