As has been the norm for the last several sessions, Parliament ended its Budget session with minimal legislative progress. Only 21 Bills, including the Finance Bill and the Copyright Bill, were passed while the much-debated Lokpal Bill was referred to a Select Committee of the Rajya Sabha (Upper House), with a three-month deadline. The Parliamentary backlog has now increased to 101 bills.

The controversy generated by India’s infrastructure and mining sector in recent months has spawned a wide ranging review of laws relating to land acquisition and mineral extraction. In this Indian context, such reviews are prone to extreme, knee-jerk reactions from policy makers and the last few weeks provided two examples. One Parliamentary committee has recommended that India should completely stop iron ore exports and only extract as much as can be consumed by the domestic industry. Another has recommended that the Government should be banned from buying land on behalf of private or even PPP projects, regardless of their purpose and importance. Neither set of recommendations is technically binding on the Government but it will not be easy to disregard these views altogether.

The Comptroller and Auditor General (CAG) made fresh allegations of corruption in the mining sector, suggesting that the Government may have lost Rs 1.8 tn due to irregularities in the allocation of captive coal mines over several years. Until the matter is fully investigated, the day-to-day functioning of the Mines Ministry will inevitably be disrupted. Already, it is seeking legal opinion on whether it should continue to allocate Mining Leases (MLs) on a first-come-first served basis until auction is made mandatory as per a recent Supreme Court judgment.		This may strengthen the argument to cut interest rates, as the RBI acknowledges, but counter forces still exist

Q1’12 growth fell to 5.6 per cent yoy (5.3 per cent on the production measure), its slowest pace since the GFC, which brought growth for FY’12 (to March) down to 6.9 per cent (6.5 per cent on the production measure). On the production side of the economy two key areas have slumped, with manufacturing contracting by 0.3 per cent yoy in the March quarter (and slowing to 2.5 per cent for the FY) while mining and quarrying, which has come to a virtual standstill in a mire of corruption, fell almost 1 per cent last FY. Consumer appetite has also fallen, with the growth of personal retail loans dropping to 11.5 per cent from its high-growth average of ~15 per cent, and the growth in passenger car sales falling to ~1 per cent in April.

This may strengthen the argument to cut interest rates, as the RBI acknowledges, but counter forces still exist. First, inflation remains high which is why the RBI has not cut interest rates in its recent monetary policy review. Justifying this RBI Governor Duvvuri Subbarao has pointed that though the headline inflation has come down, core inflation has come down to below 5 per cent, but the Wholesale Price Index (WPI) inflation is still above our tolerance level at 7.5 per cent. The consumer price inflation is running above 10 per cent, and this is disturbing. Second, a rate cut will narrow the interest rate differential between India and the developed world and further dampen foreign institutional investor (FII) flows. In the wake of the continuing Euro crisis, the Rupee fell to its life-time low of Rs 56.6 and the Central Bank will hesitate to exacerbate this trend. Unless commodity prices fall further, a rate cut may not happen immediately. In any event, the industrial slowdown is unlikely to reverse in the short term; on the contrary, a credit rating downgrade, largely contingent on policy action by the Government, may delay a recovery further.