Shyam Ponappa September 5, 2013
Policy missteps 2: Sustainable profits and stability
Profits are essential for savings, investment, stability and order. This is why sustained profitability is of paramount importance for India. Provided industrial relations are harmonious and demand is resilient, that is, momentum is positive, lower interest costs within reason can sustain positive sentiment, resulting in higher profits up to a point (see chart - right). This has been a matter of incomprehension or denial for government (central and states), the Reserve Bank of India, the judiciary, and many citizens.
Instead, we have populist handouts to capture treasuries, and irresponsibility in replenishing them. What started with cheap rice in the 1980s has degenerated into a free-for-all, promising a distribution from the treasury contingent on capturing it for aspirants, or recapturing it for incumbents: vote us in, and you'll get these spoils.
In sum, a rate cut combined with consistent actions on fiscal responsibility, disentangling projects, manufacturing, and stop-gap measures like swap facilities for oil companies and "stretching" imported coal may provide a breather. These could have a stabilising effect on the rupee, improve sentiment, and re-establish India's growth potential.