Current crisis has exposed limitations of central banking framework

Ishan Bakshi 

Over the past few months, the Reserve Bank of India, along with the monetary policy committee, has undertaken a slew of measures to arrest the economic slowdown, and address the fallout of the COVID-19 pandemic. Yet, their actions, guided by multiple considerations — inflation and growth management, debt management and currency management — have inadvertently exposed the limitations of and the inherent contradictions in the central banking framework in India.

Take the monetary policy function. The MPC is guided by the goal of maintaining inflation at 4 plus/minus 2 per cent. Since February 2019, the MPC has, and rightly so, attached primacy to reviving growth, lowering the benchmark repo rate by 250 basis points. However, in its August policy, despite dire growth prospects, it chose to maintain the status quo. This decision was driven, in part, by elevated inflation which continues to average above the upper threshold of the inflation targeting framework. This raises the question: At the current juncture, should the MPC be driven by growth considerations or should short-term inflation concerns dominate?

That there is considerable uncertainty over the trajectory of inflation is beyond debate. But at its core is a question: Is COVID inflationary or disinflationary? Will it be inflationary in the short run (retail inflation is elevated largely due to supply dislocations) but disinflationary over the medium term (with demand falling)? Or does the MPC believe that it will remain inflationary over the medium term with supply-side disruptions outweighing the effects of a fall in demand?

In large part, the current rise in inflation (CPI had fallen from January to March) is driven by supply-chain dislocations owing to the lockdowns. This is evident from the growing disconnect between the wholesale and consumer price index. Since April, while WPI has been in negative territory, CPI has been elevated, indicating, excess supply/low demand at the producer/wholesale level but excess demand/low supply at the retail/consumer level, suggestive of dislocations in the intermediate supply chain. Accepting this implies that the spurt in retail inflation will be temporary, and it will begin to trend lower as these disruptions ebb.

Monetary policy is supposed to be forward looking. So, if on balance, COVID is likely to be disinflationary over the medium term, although this will show up with a lag, then there is a case for looking beyond the current spike in retail inflation. And given the collapse in the economy and that the transmission of rate cuts takes time, it tilts the balance in favour of further easing. Worries of lower rates translating to higher future inflation may prove to be misplaced considering the extent of the fall in demand, the idle capacity in the system, and the little pricing power of producers.

Considering that the MPC expects inflation to trend lower in the second half of the year (presumably due to easing of supply side disruptions), its stance in the August meeting was puzzling. The MPC’s mandate is to deliver stable inflation over long periods of time, not just a few months. Yet, it would appear as if it is more concerned about elevated inflation in the short run. Will a few more months of data end its uncertainty that this is not a cyclical deviation but a structural downshift? Perhaps. Unless the current MPC believes that it has approached the limits of conventional easing.

One could also argue about the inefficacy of monetary policy at the current juncture, and thus the limited options before the committee other than to hold, and keep the power dry. But this argument is driven more so by the absence of policy levers available to the committee other than the repo rate. Expanding the range of policy levers available to it may well render this argument void.

Equally puzzling is the refusal to provide any firm projection of future inflation. While there is considerable uncertainty over economic conditions, surely, the committee members are basing their decisions on some expectation of future inflation and growth. These should have been publicly disclosed. While it is possible that the minutes of the MPC meeting shed light on their expectations, ideally, all MPC members should provide their individual estimates of inflation and growth.

This growth-inflation conundrum is just one part of the story. The current crisis has also brought to the fore the inherent contradictions between the MPC’s operations, and the RBI’s debt and currency management functions, pointing towards a larger structural challenge.

As manager of the government debt, the RBI is tasked with ensuring that the government’s borrowing programme sails through smoothly. To this end, it has carried out several rounds of interventions popularly known as operation twist. These interventions involve the RBI buying longer-dated government bonds, while simultaneously selling an equivalent amount of shorter-dated securities — pushing down long-term Gsec yields, and exerting upward pressure on short-term yields as a consequence. In doing so, the RBI ended up doing exactly the opposite of what the MPC was trying to achieve by cutting short term rates, well before it reached the lower limit of its conventional policy response.

Further, the RBI’s interventions in the currency market — intervening in order to prevent the rupee from appreciating — have constrained its ability to carry out open market operations as these would have led to further liquidity injections into the system. Put differently, its debt management functions have run up against its currency management functions. Underlining the complexity of all this is the talk of sterilisation — the opposite of injecting liquidity in the system.

The central bank must develop a clear strategy on what to do. At the one end, it is legally bound to an inflation target. Yet, at this juncture, there is a strong argument to look past the current spurt in inflation, and test the limits of both conventional and unconventional monetary policy. At the other end, while it may want to intervene to prevent the rupee’s appreciation, in doing so, it is constricting its debt management functions which will have its own set of consequences. There are no easy answers.

This article first appeared in the print edition of Indian Express on August 19, 2020 under the title ‘RBI’s dilemma’. ishan.bakshi@expressindia.com

Eyes wide shut

Ashok V. Desai
We have received the government’s view of the economy in the past week, which is understandably rosy. It did not mention another view, which was made public just before Washington closed down for Christmas: the letter of the International Monetary Fund’s executive board to our government, enclosing what its staff saw when it came to Delhi for its annual consultation.

The government put some fresh capital into its banks, and transferred their bad debts and started suing some bad debtors under its insolvency and bankruptcy code. As a result, banks are a bit better off; the share of bad debts in their loans fell from 11.5 to 9.3 per cent in the year till March 2019. As a result, bank credit growth rose for a while. But non-bank financial institutions were not helped; so their credit shrank. The corporate sector’s profitability and capacity to service debt continued to be below normal.

Unlike in industrial countries, unemployment is estimated only once in four or five years in India. The last estimate is for 2017-18; it is the highest in 45 years. Rural unemployment is normally 3-4 per cent; in 2017-18 it shot up to 8 per cent. Amongst urban women, it is usually 8-10 per cent; it rose to 13 per cent. People can be unemployed only if they have had a job or are seeking one; between 2004-05 and 2017-18, the male participation rate fell from about 85 to 75 per cent, whilst the female participation rate fell from 40 per cent to almost 20 per cent. Participation rate can change with age structure; children and old people do not usually work, and are not regarded by the government as being in the workforce. But that cannot account for the halving of female participation.
The gross domestic product growth in the second quarter of 2019 was 5 per cent — the lowest since 2008. The slowdown is demand-led; headline inflation in 2018-19 was 3.4 per cent, the lowest in eight years. This is new; India has generally maintained an indecent inflation rate of 8 per cent or more.
IMF observers were of the view that the government should concentrate on three policy reforms. First, the governance of government banks should be strengthened, and so should the regulation and oversight of non-bank financial companies. Second, the government must follow the recommendation of the Fiscal Responsibility and Budget Management Review Committee and reduce debt-GDP ratio from the current 70-odd per cent to 60 per cent. Fiscal deficit should be brought down by bringing individuals and households into the income tax net and reducing subsidies. More measures would be needed; the IMF suggested extension of property taxation, higher coal cess, and applying normal income taxation to agricultural income. Finally, land, labour and product markets should be reformed; the distinction between formal and informal sectors should be removed, and the labour market should be made more flexible (that is, the restrictions on dismissal of workers in the formal sector should be removed).
The IMF noted the cyclical downturn, but opposed fiscal stimulus to counter it; it was more important to bring down the ratio of public debt to GDP from its current level of 69 per cent to 60 per cent. From this viewpoint, what matters is not the Centre’s fiscal deficit, but public sector borrowing requirement, which covered fiscal deficits of the Centre and the states plus borrowings of public enterprises. The PSBR-GDP ratio is unlikely to come down in the current financial year; on the contrary, the weak state of the economy may cause tax revenues to decline and PSBR to rise further. The IMF showed that, year after year, the actual fiscal deficit exceeded what the budget forecast: the finance ministry is systematically over-optimistic. The Indian government pays about 5 per cent of GDP in interest; BRICS pays about 3 per cent, and the Asean 2 per cent. Hence fiscal stimulus would be wrong; the IMF favoured fiscal consolidation — a reduction of the PSBR-GDP ratio. It suggested cutting subsidies on food, fuel and fertilizers. The goods and services tax should be streamlined and extended to electricity and petroleum products. Income tax should be levied at a lower income, and its peak rate should be raised. And the government’s habit of not showing all its expenditure in the budget should be given up.
Since there is no room to use fiscal stimulus against the current slowdown, the IMF supported the government’s use of monetary policy — the Reserve Bank of India’s reduction of policy rates by 135 basis points from 6.5 to 5.15 per cent this year, and projected reduction in statutory liquidity ratio to 18 per cent by April this year.
The IMF mildly approved the government’s efforts to help banks recover their non-performing loans, and cryptically noted that 12 major banks continued to be in government ownership — and hence did not have the incentive to make profits. It called for improvement in banks’ risk management. The government should privatize its banks; meanwhile, it should appoint independent boards, and remove RBI people from them. It should set up a specialized institution for liquidating bankrupt banks and introduce deposit insurance and emergency liquidity assistance. The government did not like these suggestions; it is still very happy to own banks and keep them under its thumb.
The National Housing Bank was supposed to regulate housing finance companies; but it slept while they gave unwise loans and went bankrupt. Their supervision has been transferred to the RBI. The IMF approved, but told the RBI to keep their supervision separate from bank supervision. It is important to prevent stress spreading from them to banks; for this, the RBI should start collecting more up-to-date and detailed data.
The IMF noted improvement in India’s corruption perceptions index: it was lower than in emerging markets and developing countries in 2012, and exceeds theirs now; but it is much lower (worse) than in industrial countries. The ease of doing business has also improved; but contract enforcement, land acquisition and insolvency resolution remain problem areas. Faster regulatory approvals, more single-window clearance and greater judicial efficiency would help.
India has reduced import duties, but they are still high and are changed too often. Trade costs and processing times continue to be high. Trade in services continues to be subject to entry restrictions on foreign people and firms, barriers to competition and non-transparent regulation.
The IMF pointed out for the umpteenth time the terrible effects of India’s labour laws which make it impossible to dismiss workers whether they work or not. They have made India’s industry lag in efficiency and lose out in international competitiveness; India has virtually lost out on industrialization. The GST created a chance to make India a single market; but it cannot be because states have different labour laws. The IMF may continue to preach on this for years, but nothing is likely to change.
The IMF staff report also gives the responses of the Indian government, which are mostly defensive and uncooperative. For the Indian government, its laws and practices are holy; it is least likely to reform them on the suggestion of the Fund or the World Bank. But their critique is worthy of attention at a time when domestic dissent is being discouraged.

Only way is up for interest rates after inflation hits 6-year high

By Paran Balakrishnan

Goodbye interest rate cuts. The leap in headline consumer price inflation to its highest level in nearly six years means the interest-rate cutting cycle is over and that the next interest rate move will be up, say analysts.

While good news for savers, this is the latest piece of bad news for Prime Minister Narendra Modi’s government under whose watch the economy’s been tanking. For finance minister Nirmala Sitharaman, the adverse inflation climate only makes her job of preparing her “pro-people, pro-growth” budget, due to be presented February 1, even tougher.

The government has been pushing for rates to come down further, even though the monetary easing medicine hasn’t had an effect. Financial institutions have been slow to pass on the rate cuts and in any event, businesses are more inclined to hang on to their money and repair balance sheets than make investments when demand’s sluggish. (The extent of how sluggish demand is was highlighted when India’s flagship auto industry reported car sales dropped a record 19 per cent year-on-year in 2019).
Despite a string of cuts in this rate-cutting cycle which began in February last year, economic growth has kept falling with second-quarter growth hitting 4.5 per cent, its lowest in six years. The government now projects Indian economy will expand in the full-fiscal year by 5 per cent, down from 6.8 per cent which would be the lowest pace in 11 years. But privately economists say the growth figure could well be lower with Fitch Ratings, for instance, pegging it at 4.6 per cent, citing “weakening business and consumer confidence.”

Now, throwing a further spanner into the works is accelerating inflation. India looks to be in the embrace of that toxic mix known as stagflation -- defined as slow economic growth, increasing unemployment and rising prices. Traditionally, when an economy is in the doldrums, the remedy is cutting rates. Now, though, it’s virtually certain that the Reserve Bank of India will keep its benchmark policy rates unchanged when it meets next in early February. And inflation could also mean that rate hikes will come earlier than expected.

“The jump in headline CPI (consumer price inflation) to its highest since 2014 almost guarantees that the RBI will leave policy rates on hold at its next meeting in early February. And with core inflation likely to rise over the coming quarters... policy rates will be hiked much sooner than most are expecting,” say Mark Williams, Capital Economics chief Asia economist.

Williams said that the available data for January show that food inflation has yet to ease and, “If we are right in forecasting a rise in global oil prices this year, fuel inflation looks set to rise further as well.” Heading the list of vegetable-inflation drivers are onions (which traditionally make Indian governments weep) Shutterstock

So why does the interest rate-easing party seem to be over? Let’s remember first of all that the central bank’s target for headline inflation is 4 per cent and inflation has only been heading northward of that figure. CPI inflation jumped from 5.5 per cent year-on-year in November to 7.4 per cent year-on-year in December -- a staggering 181 basis-point jump. That is the biggest rise since July 2014.

The rise was broad based but mainly driven by food inflation -- specifically vegetables which are up a staggering 60.5 per cent year-on year. And heading the list of vegetable-inflation drivers are onions (which traditionally make Indian governments weep). The headline figure is the highest it’s been since July 2014. By the way, this upward move was far bigger than expected by the financial markets which expected the December rate to be around 6.7 per cent. There’s also been shocks from the rise in oil prices.

Core inflation, which excludes the volatile movements of food and fuel, is looking more stable, edging up to 3.75 per cent even after mobile phone companies substantially raised subscriber costs and railway fares rose. But economists believe core inflation will also creep higher to around 4 per cent.

“We expect the central bank to switch to tightening mode much sooner than is generally expected. We are forecasting modest rate hikes in 2021 with the first move possible before,” says Capital Markets’ Williams.

Economists figure it’s already a given that the financially strapped government will have to burst its fiscal deficit target in the budget. Adding to the government’s woes on this score are the lower-than-forecast revenue collections. It all means that the government will likely have to leave out any feel-good, economy-boosting income tax cuts.

“The upcoming budget in February would be closely watched for fiscal stance and sector-specific actions. Even so, our estimates suggest inflation will likely remain above 6.5 per cent in the fourth quarter of 2020 and could constrain a rate cut in February,” financial services firm Edelweiss says.

HDFC Bank Chief Economist Abheek Barua says the government needs to put more attention on the agricultural sector as higher food prices have a big driver of the higher inflation via better food stock management to avoid shortages. But there’s a big unknown with the rabi crop. Economists also say that the 45 per cent weightage of food prices in the consumer consumption basket may be unrealistic and needs to be reassessed.

What’s ahead for prices? Well, economists expect inflation to stay high in January as well but say it could retreat in the second and third quarters to 4.7 per cent or a little lower, and then head sharply south to possibly 2-2.5 per cent in the fourth quarter.

And if all this bad economic news wasn’t enough, the slow growth is now having a “visible impact” on job creation, notes the State Bank of India. In fiscal year 2019, India created 89.7 lakh new jobs. “In fiscal 20, as per currently projected, this number could be at least 15.8 lakh lower, the SBI said on January 13.

The Confederation of Indian Industry in its pre-budget recommendations to the government says, “All engines of growth are showing sluggishness – consumption, investments and exports, placing the burden of kickstarting the economy on government expenditure.” The CII adds that, “a flexible, yet prudent fiscal policy is the need of the hour.” That’s a tall order under the circumstances, especially as the government has its plate full on the political front, struggling to control the after-effects of passage of the Citizenship Act.

Impression that government prioritises non-economic agenda over development must be addressed

Written by Amartya Lahiri India is now well and truly in the middle of a socio-economic upheaval. The economy has been weakening for a couple of years now. The social upheaval is new but its seeds have been fermenting for a while. The danger here is that the social and economic sides of an economy are not divorced from each other. Each influences the other and the current quagmire threatens to unleash the worst type of feedback between the two.

The most dangerous smoldering ember that could erupt due to the interaction between the social and economic sides is unemployment. The rising unemployment in the country has been commented upon widely. Less noted is the fact that rising unemployment disproportionately affects the young. Misfiring European economies like Spain, Greece, and others routinely report youth unemployment rates above 25 per cent. This is a social tinder box for a country like India whose median citizen is in the 30s and which is thrusting 10 million new young people to the job market every year. This dynamic, popularly hailed as India’s demographic dividend, can rapidly turn into a demographic curse if the employment situation doesn’t improve. A massive pool of unemployed youth makes for a huge collection of unhappy people, running high on testosterone and anger, looking to vent.

Along with this volatile pre-existing cocktail, we now have the addition of the state strong-arming youth protesters across the country. Each violent police action begets more resentment, protests, and additions to the ranks of protesters. Unemployed youth are fodder in these situations for all sides. The young can provide volume, sound, and muscle with relatively little concern for self in normal times. Lack of attractive opportunities makes this risk-taking trait more acute. Self-preservation is a predilection that affects the middle-aged more since they have more to protect.

So where will the jobs come from? The job creators are entrepreneurs, conglomerates, and multinationals. It is in their nature to take investment risks as long as the returns are high enough. Investment rates in India fell well below 30 per cent a while back. Clearly, the returns were not compensating entrepreneurs for the risk. The recent social upheaval is only adding to the perceived risk. It can only be dissuading more fence-sitters from investing in the economy until the uncertainty ebbs and the situation calms down. But the more investors adopt a “wait-and-see” approach, the worse the job situation will become. The worse the job situation becomes, the greater will be the ranks of the angry youth. This has all the makings of a devastating feedback loop. For the sceptical, the examples of Brazil (28 per cent youth unemployment) and South Africa (58 per cent youth unemployment) should be salutary examples of emerging economies descending into crime, violence, and crisis due to failing to productively (and respectfully) engage their youth.

The government’s focus on the economy is unclear. Through its personnel decisions in the past few years, the central government has signaled its low priority on economic management. The position of Deputy Governor (Monetary Policy) of the RBI lay vacant since July 2019 when Viral Acharya resigned. Despite the fact that he announced his decision to resign back in May 2019, the government only filled the vacancy this week. In the interim, the Monetary Policy Committee was operating without a key technical specialist for seven months. A previous vacancy for Deputy Governor of the RBI also remained unfilled for 11 months before MK Jain was appointed in June 2018.

This is particularly debilitating for the RBI because the government replaced Governor Urjit Patel with someone whose domain competence does not lie in either banking or finance or markets or macroeconomics or monetary economics. To compound matters, the government has chosen as economic advisors two people whose domain specialisation is in markets, banking and finance. They would be far better used in the RBI rather than the ministry of finance, which requires trained macroeconomists.

The choice of personnel in key ministries has been equally confusing. In the latest garnish to this soup of confusion, the prime minister was accompanied by the home minister during pre-budget consultations about the state of the economy with industrialists and economists. Strangely, the finance minister was not included in these deliberations.

The overarching impression all of this has given is that the government has prioritised its non-economic agenda over the development agenda. This has become more glaring over the last 18 months when the government started running out of the low oil price largesse that financed its welfare spending till 2017. Without the fiscal room for more spending and the political will to enact labour and land reforms, the government seems out of ideas. Its only proactive moves appear to be retrograde ones such as raising import duties. More damagingly, it is seen as trying to control the message by refusing to release data. This just makes things worse because people assume the worst.

A few changes are needed immediately. The government needs to announce a clear plan and timeline for structural reforms. Alongside, it has to start staffing technical positions by prioritising domain competence and empowering these hires with policy relevance. Importantly, it needs to pledge its commitment to the integrity of institutions tasked with the regulation of corporations and banks, monetary policy management, data collection/dissemination and law enforcement.

The government also needs to desist from trying to drown out protesting voices with state muscle power. Protests serve as a pressure cooker valve. They preserve order by allowing people to vent. Hope goes a long way, especially for the young. A climbdown from the arrogance of power would be a good way of generating hope.

This article first appeared in the print edition on January 16, 2020 under the title ‘Reset and refocus’. The writer is Royal Bank Research Professor of Economics, University of British Columbia

റിസർവ് ബാങ്ക് എന്ന ഗോമാതാവ്

ജോർജ്‌ ജോസഫ്‌

സാമ്പത്തികപ്രതിസന്ധി അതിരൂക്ഷമായ സാഹചര്യത്തിൽ റിസർവ് ബാങ്കിന്റെ കരുതൽ ശേഖരത്തിൽ വീണ്ടും കൈയിട്ടുവാരുകയാണ് കേന്ദ്ര സർക്കാർ. ഇടക്കാല ലാഭവിഹിതമായി 40,000 കോടി രൂപ അനുവദിക്കണമെന്നാണ് റിസർവ് ബാങ്കിനോട് കേന്ദ്രം ആവശ്യപ്പെട്ടിരിക്കുന്നത്. രാജ്യത്തിന്റെ സാമ്പത്തികവളർച്ച താഴോട്ടായ സാഹചര്യത്തിൽ ,‘അസാധാരണമായ' ഒരു വർഷം എന്ന സ്ഥിതി പരിഗണിച്ച്, പണം അനുവദിക്കണമെന്നാണ് ആവശ്യം.

സാധാരണഗതിയിൽ ആർബിഐ ഇടക്കാല ലാഭവിഹിതം അനുവദിക്കുന്ന പതിവില്ല. എന്നാൽ, കഴിഞ്ഞ മൂന്ന് സാമ്പത്തിക വർഷങ്ങളിൽ തുടർച്ചയായി ഇടക്കാല ഡിവിഡന്റ് നൽകുന്നതിന് സർക്കാർ നിർബന്ധിക്കുകയും റിസർവ് ബാങ്ക് അത് അനുവദിക്കുകയും ചെയ്തു. ഏതാനും മാസങ്ങൾക്ക് മുമ്പാണ് 1 .76 ലക്ഷം കോടി രൂപ ഈ ഇനത്തിൽ സർക്കാരിന് കൈമാറിയത്. ഇതിൽ 1.48 ലക്ഷം കോടിയും നടപ്പ് സാമ്പത്തികവർഷത്തിൽ മുൻകൂറായി നൽകിയതാണ്. ഇതിനു പുറമെയാണ് 40,000 കോടി കൂടി നൽകണമെന്ന് ആവശ്യപ്പെട്ടിരിക്കുന്നത്.
നികുതിവരുമാനം ഉൾപ്പെടെയുള്ള ധനാഗമ മാർഗങ്ങളിൽ വലിയ തോതിൽ ഇടിവുണ്ടായിരിക്കുന്ന സാഹചര്യത്തിലാണ് സർക്കാർ റിസർവ് ബാങ്കിനെ പിഴിയുന്നത്. പരോക്ഷനികുതിയിൽ, പ്രത്യേകിച്ച് ജി എസ്ടിയിൽ നിന്നുള്ള വരുമാനത്തിലെ ഗണ്യമായ ചോർച്ച ധനകമ്മി രൂക്ഷമാക്കി. ധനകമ്മി പ്രതീക്ഷിച്ചിരുന്നതിനേക്കാൾ 115 ശതമാനം അധികമാകുമെന്നാണ് ഇപ്പോൾ കണക്കാക്കപ്പെട്ടിരിക്കുന്നത്. ഫെബ്രുവരി ഒന്നിന് നിർമല സീതാരാമൻ അവതരിപ്പിക്കുന്ന ബജറ്റിൽ ആദായനികുതി ഇളവ് ഉൾപ്പെടെയുള്ള ചില ജനപ്രിയപ്രഖ്യാപനങ്ങൾ പ്രതീക്ഷിക്കുന്നുണ്ട്. ഇത് ചെലവുകൾ കുത്തനെ ഉയർത്തും. ഇത്തരത്തിൽ സാമ്പത്തികപ്രതിസന്ധി അതിസങ്കീർണമാകുകയും അത് പരിഹരിക്കുന്നതിന് സർക്കാരിന് മുന്നിൽ പോംവഴികൾ കുറഞ്ഞതുമാണ് വീണ്ടും റിസർവ് ബാങ്കിനെ സമീപിക്കുന്നതിന് കാരണം. ക്യാപിറ്റൽ റിസർവ് എന്ന രീതിയിൽ ഇത്ര വലിയ ശേഖരം ആവശ്യമില്ല എന്ന നിലപാടാണ് കേന്ദ്ര സർക്കാരിനുള്ളത്. അതുകൊണ്ട് മൂന്ന് ലക്ഷം കോടി രൂപയെങ്കിലും സർക്കാർ ഖജനാവിലേക്ക് കൈമാറണമെന്ന് ഒന്നാം മോഡി സർക്കാർ റിസർവ് ബാങ്കിന് മുന്നിൽ നിർദേശം സമർപ്പിച്ചിരുന്നു. രാജ്യത്തിന്റെ സമ്പദ്‌വ്യവസ്ഥയെ അസ്ഥിരപ്പെടുത്തുന്നതും ആർബിഐയുടെ സ്വയംഭരണ അവകാശങ്ങളിലേക്ക് നേരിട്ടുള്ള കടന്നുകയറ്റവുമായ ഇതിനെ അന്നത്തെ ഗവർണർ ഉർജിത് പട്ടേൽ ഉൾപ്പെടെയുള്ളവർ എതിർത്തു. എന്നാൽ, തങ്ങളുടെ ഇംഗിതം ഒരു വിദഗ്ധസമിതിയുടെ റിപ്പോർട്ടായി കൊണ്ടുവന്ന്, അത് റിസർവ് ബാങ്കിന്റെ ഡയറക്ടർ ബോർഡിനെ കൊണ്ട് അംഗീകരിപ്പിച്ചാണ് കേന്ദ്രസർക്കാർ തീരുമാനം നടപ്പാക്കിയത്. തുടർന്ന് റിസർവ് ബാങ്കിന്റെ ചരിത്രത്തിൽ രാജിവയ്‌ക്കേണ്ടിവരുന്ന അഞ്ചാമത്തെ ഗവർണറായി ഉർജിത് പട്ടേലിന് മാറേണ്ടി വന്നു. പകരം ഒരു പാവ ഗവർണറെ അവരോധിക്കുകയും അദ്ദേഹവും ഡയറക്ടർ ബോർഡും മോഡി–-അമിത് ഷാ കൂട്ടുകെട്ടിന്റെ താളത്തിന് തുള്ളുന്നതുമാണ് ഇപ്പോൾ ആർബിഐയിൽ നടക്കുന്നത്. വിയോജിപ്പ് തുറന്ന് പ്രകടമാക്കിയ ഡെപ്യൂട്ടി ഗവർണർ വിരൽ ആചാര്യയും കേന്ദ്ര ബാങ്കിന്റെ പടിയിറങ്ങി.

ലാഭവിഹിതം അവകാശമല്ല
കേന്ദ്രസർക്കാരിന് ഇങ്ങനെ ലാഭവീതം ആവശ്യപ്പെടാൻ അധികാരമോ, അവകാശമോ ഇല്ല എന്നതാണ് നിയമവും കീഴ്‌വഴക്കങ്ങളും ഇതഃപര്യന്തമുള്ള പ്രവർത്തനരീതിയും വ്യക്തമാക്കുന്നത്. കമ്പനി നിയമങ്ങൾ പ്രകാരം ഡിവിഡന്റ് നൽകുക സാധാരണമാണ്. എന്നാൽ, അത് ഒരിക്കലും ഓഹരി ഉടമയുടെ അല്ലെങ്കിൽ ഉടമകളുടെ അവകാശമല്ല. ഒരു കമ്പനിയുടെ ഓഹരികൾ കൈവശമുള്ള ഒരു വ്യക്തിക്ക് എനിക്ക് ലാഭവിഹിതം തരണം എന്ന് ആവശ്യപ്പെട്ട് കോടതിയെ സമീപിക്കാൻ കഴിയില്ല. അത് നിയമപരമായ ഒരു അവകാശമല്ല. കമ്പനി മെച്ചപ്പെട്ട അറ്റാദായം നേടുമ്പോൾ ഓഹരി ഉടമകൾക്ക് അവരുടെ നിക്ഷേപത്തിനുള്ള പ്രതിഫലം എന്ന നിലയിലാണ് ഡിവിഡന്റ് അനുവദിക്കുക. സാധാരണരീതിയിൽ ഇത് കമ്പനിയുടെ ഡയറക്ടർ ബോർഡ് ശുപാർശചെയ്യുകയും ഓഹരി ഉടമകളുടെ വാർഷിക പൊതുയോഗം അതിന് അംഗീകാരം നൽകുകയും ചെയ്യുന്നതോടെയാണ് ഇതിനുള്ള നടപടിക്രമം പൂർത്തിയാകുന്നത്. അത് എത്ര ശതമാനം വേണം, എപ്പോൾ നൽകണം തുടങ്ങിയ കാര്യങ്ങൾ കമ്പനിയുടെമാത്രം അധികാരത്തിൽ വരുന്ന വിഷയങ്ങളാണ്. സാമ്പത്തികവർഷത്തെ ത്രൈമാസഫലങ്ങൾ വിലയിരുത്തി മികച്ച പ്രവർത്തനം കാഴ്ചവയ്ക്കുന്നു എന്ന് വ്യക്തമായാൽ ഇടക്കാല ലാഭവിഹിതവും നൽകാറുണ്ട്. ഇത് മൂലധന നിക്ഷേപ രംഗത്തെ പ്രവർത്തനരീതിയാണ്. എന്നാൽ, ഇത് ഒരിക്കലും ഓഹരി ഉടമകളുടെ നിയമപരമായ അവകാശമായി മാറുന്നില്ല. ഒരു കമ്പനിക്ക് അവരുടെ ലാഭം പല രീതിയിൽ സൂക്ഷിക്കുന്നതിനുള്ള അവകാശ - അധികാരങ്ങളുണ്ട്.

അതുകൊണ്ടാണ് റിസർവ് ബാങ്കിനോട് ലാഭവിഹിതം ചോദിക്കുന്നത് അതിന്റെ സ്വയംഭരണ അവകാശങ്ങളിലുള്ള പ്രത്യക്ഷ ഇടപെടലായി മാറുന്നത്. അത് സ്വാഭാവികമായി കൈമാറുന്ന ഒരു കാര്യമാണ്. റിസർവ് ബാങ്കിനെ സംബന്ധിച്ചിടത്തോളം സാധാരണ കമ്പനികളെ പോലെ ലാഭ നഷ്ട അടിസ്ഥാനത്തിൽ മാത്രമല്ല പ്രവർത്തനം. അതിന്റെ പ്രവർത്തനങ്ങളിൽനിന്ന് ലഭിക്കുന്നസാമ്പത്തികനേട്ടത്തെ ലാഭം എന്ന് പോലും വിശേഷിപ്പിക്കാറില്ല. സർപ്ലസ് അഥവാ മിച്ചം എന്ന വാക്കാണ് ഇവിടെ പൊതുവെ ഉപയോഗിക്കാറ്. ആർബിഐയുടെ പ്രവർത്തനത്തിനും അടിയന്തര സാഹചര്യങ്ങൾക്കാവശ്യമായ ഫണ്ടുകളും നീക്കിവയ്ക്കുന്നത് ഈ മിച്ചത്തിൽനിന്നാണ്. റിസർവ് ബാങ്കിന്റെ ഓഹരി ഉടമകൾ കേന്ദ്ര സർക്കാരാണ്. സ്വാഭാവികമായും കേന്ദ്രത്തിന് ലാഭവിഹിതം നൽകേണ്ടത് അവരുടെ ബാധ്യതയുമാണ്. എന്നാൽ, തങ്ങൾക്ക് ഇത്ര തുക ഈ ഇനത്തിൽ നൽകണം, ക്യാപ്പിറ്റൽ റിസർവുകളായി ഇത്ര തുക സൂക്ഷിക്കുന്നതെന്തിനാണ്, ഞങ്ങൾ ആവശ്യപ്പെടുമ്പോഴെല്ലാം പറയുന്ന തുക ഇടക്കാല ലാഭവിഹിതമായി നൽകണം എന്നെല്ലാം നിർദേശിക്കുന്നത് അതിന്റെ സ്വയംഭരണ അവകാശത്തെ ഹനിക്കലാണ്, പ്രവർത്തനത്തിൽ നേരിട്ട് ഇടപെടുന്നതിന് തുല്യവുമാണ്. മാത്രവുമല്ല, ഇത് റെഗുലേറ്റർക്കുമേൽ അസാധാരണമായ സമ്മർദം ഉണ്ടാക്കുകയും ചെയ്യുന്നു. ഉർജിത് പട്ടേൽ രാജിവയ്ക്കാൻ ഇത്തരം സമ്മർദം ഒരു കാരണമായിരുന്നു.

വിത്തെടുത്ത്‌ കുത്തുന്നു
സ്വയംഭരണസ്ഥാപനങ്ങളിൽ ഏറെ പ്രത്യേകതയുള്ള ഒന്നാണ് റിസർവ് ബാങ്ക്. രാജ്യത്തിന്റെ സാമ്പത്തികഘടനയുടെ അസ്‌തിവാരം എന്ന് പറയുന്നത് കേന്ദ്ര ബാങ്കും അത് സൂക്ഷിക്കുന്ന റിസർവുകളുമാണ്. സമ്പദ്ഘടനയുടെ നിലവാരവും കറൻസിയുടെ മൂല്യവുംമറ്റും ഇതിനെ ആധാരപ്പെടുത്തിയാണിരിക്കുന്നത് . കേന്ദ്ര സർക്കാരിന്റെ ആജ്ഞ അനുസരിക്കുന്ന ഒരു സംവിധാനമല്ല കേന്ദ്ര ബാങ്ക്. രാജഭരണം നിലവിലുള്ളതുൾപ്പെടെ ഒരു രാജ്യത്തും അത് അങ്ങനെയല്ല. ഇന്നത്തെ രീതിയിലല്ലെങ്കിലും ഇന്ത്യയിൽ നാട്ടുരാജാക്കന്മാർ ഭരിച്ചിരുന്ന കാലത്തും ഇത്തരത്തിൽ സമ്പത്ത് സൂക്ഷിക്കുന്നതിന് കാണിച്ചിരുന്ന വ്യഗ്രതയുടെ ഒരു ഉത്തമദൃഷ്ടാന്തമാണ് ശ്രീപത്മനാഭസ്വാമി ക്ഷേത്രത്തിൽ സൂക്ഷിച്ചിരുന്ന നിധിശേഖരം. ആ വിത്തെടുത്ത് കുത്താൻ രാജഭരണംപോലും ശ്രമിച്ചിരുന്നില്ല. അതുകൊണ്ട് റിസർവ് ബാങ്കിന്റെ അധികാരത്തിന്മേൽ കടന്നുകയറുന്നത് വിപൽക്കരമായ നീക്കമാണ്‌. സർക്കാരിന്റെ സാമ്പത്തികപ്രതിസന്ധി പരിഹരിക്കലല്ല റിസർവ് ബാങ്കിന്റെ കടമ. അത് രാജ്യത്തെ പണവ്യവസ്ഥയുടെ സൂക്ഷിപ്പുകാരനാണ്. വിപണിയിലേക്കുള്ള പണത്തിന്റെ ഒഴുക്ക് ക്രമീകരിച്ച് സാമ്പത്തികവ്യവസ്ഥയുടെ സുസ്ഥിരത സൂക്ഷിക്കേണ്ട സ്ഥാപനമാണ് . അല്ലാതെ സ്വയം കുഴിച്ച കുഴിയിൽ വീണ് കൈകാലിട്ടടിക്കുന്ന മോഡിയെയും അമിത്‌ ‌ഷായെയും സാമ്പത്തികമെന്നാൽ ആട്ടിൻകാഷ്‌ഠമാണോ, കൂർക്കക്കിഴങ്ങാണോ എന്നുപോലും തിരിച്ചറിയാൻ കഴിയാത്ത നിർമല സീതാരാമൻ ഉൾപ്പെടെയുള്ളവരെയും രക്ഷിച്ചെടുക്കലല്ല ആർബിഐയുടെ ജോലി. ഇവിടെ ഒരു കറവപ്പശുവിനെ എന്ന പോലെ റിസർവ് ബാങ്കിനെ ഉപയോഗിക്കുകയാണ് കേന്ദ്രഭരണത്തിലുള്ളവർ. കറന്ന് കറന്ന് അകിടിൽനിന്ന് ചോരവരെ പിഴിഞ്ഞെടുക്കുന്നത് സാമ്പത്തിക മേഖലയിൽ വൻ പ്രത്യാഘാതം സൃഷ്ടിക്കും. ഈ ഓർമകൾ ഉണ്ടായിരിക്കേണ്ടവർ രാജ്യത്തെ എല്ലാ സ്വത്തിന്റെയും ആത്യന്തിക ഉടമകളായ ജനങ്ങളാണ്.

GDP fall smooth as waterfall

Ashok V. Desai
The graph is smooth like a waterfall: in the quarters beginning with April 2018, the year-on-year growth in gross domestic product at constant prices has been 8.1, 8.0, 7.0, 6.6, 5.8, 5.0 and 4.5 per cent. The Central Statistics Office has not released details of GDP composition. But in the April-September half-year, GDP growth fell from 7.3 per cent in 2018 to 4.6 per cent in 2019. Manufacturing, which in the previous half year had grown by 9.4 per cent, shrank this year by 0.2 per cent. Growth of construction fell from 9.1 to 4.6 per cent. Agricultural growth declined from 5 to 2.1 per cent. The only sector that boomed was — no prize for guessing — government, whose growth rose from 8.1 to 10.1 per cent.

The government dismissed the governor of the Reserve Bank of India, and sent its obedient servant from Delhi to Mumbai to take his place. The new governor transferred a good deal of RBI’s capital funds, carefully accumulated over decades, to finance the Central government. This is old news; but the figures underlying it are shocking. In the budget it presented in February, the government had planned to borrow Rs 4.48 trillion during the year ending next March. By September, it had borrowed Rs 4.78 trillion — Rs 300 billion more than it had planned to borrow in the year. It sold Rs 612 billion of its loans to the National Small Savings Fund and, as if that was not enough, it raided small savings and took away another half a trillion. That was what it did till September; we can only wait and see what further havoc it would wreak in the current half year.

Why is the government so desperate? Why has it destroyed the independence of the central bank? Why is the government of a once fairly well-run state following in the footsteps of reckless Latin American governments? Argentina is the country of gold — in name. Living with a few hundred per cent a year of inflation and without any gold or foreign exchange reserves is normal for Argentina and other Latin American states. India is one of the world’s largest hoarder and importer of gold. Does India want to move from drinking chai to dancing cha cha cha?

Why should it not? It has only to look at its own history to see why. From 1947 till 1991, it had at least one balance of payments crisis every decade. Everyone clapped if the government brought down inflation below 8 per cent. Finance ministers believed that profligacy was patriotic, and spent without caring a hoot about the economy. Finally, the humiliation of running abroad repeatedly with a begging bowl made P.V. Narasimha Rao change the government’s ways. But that is all history. Today, with foreign exchange reserves touching $450 billion, who cares? The finance minister is playing her maiden innings; does she understand the importance of macroeconomic policy? Let us dance duffmuttu, and let the treasury take care of itself — though taking care of the economy is not its priority. A Man peeps through the gates of a closed Shalimar Paints factory in Howrah. Telegraph file picture

But some economists just cannot help worrying about the economy. Arvind Subramanian and Josh Felman have collected reams of statistics and investigated what led to India’s great slowdown. As they show, industrial growth in India has been modest for years; but in the last year, output index of consumer goods industries hardly grew, whilst investment index fell. Direct tax collections show no growth this financial year; non-oil exports are stagnant, whilst imports have fallen. Growth of power generation is close to zero — the lowest in three decades. The world’s fastest growing economy has suddenly given up on growth. The government has drastically reduced corporate tax, and the RBI has cut its interest rate, but the economy has refused to perk up.

Subralman trace back its travails to the global financial crisis of 2008. To save the Indian economy from the global slowdown, the government spent madly on infrastructure — mainly power — projects. State governments buy votes with electric power; they give it to their voters free or below cost. So the private companies that were foolish enough to invest went bankrupt. That led to the Twin Balance Sheet Problem — the insolvency of companies that had borrowed to invest in infrastructure loaded up banks’ balance sheets with bad debts, which we prefer to call non-productive assets. Export growth too sputtered.

The government ran deficits. Many new lenders came up, and their loans started a home building boom. By 2017, the housing boom, too, sputtered: there were no buyers for flats, builders went bankrupt, and so did the lenders — whom we prefer to call non-bank finance companies. The balance sheets of builders and their lenders got loaded with bad debts; the Twin Balance Sheet problem turned into a Quadruple Balance Sheet problem.

How to sort out this mess? Subralman opt for five Rs. First, recognition. Raghuram Rajan had organized an Asset Quality Review to establish the real quality of bank loans — which were good, bad and doubtful, and what could be recovered from no-good loans. There should be another AQR, covering banks as well as NBFCs. Second, resolution. Urjit Patel and Viral Acharya had spelt out the resolution procedure in February 2018; detail was added to it in June 2019. Subralman essentially argue for a law that would strengthen creditors’ hands and limit the courts’ and tribunals’ power to hold up and delay resolution. They also propose two specialized resolution drivers — ‘bad banks’ — which would take over banks’ bad loans to power and real estate sectors respectively and accelerate resolution.

Next, regulation: Subralman want greater powers for the RBI. It should strengthen its prompt corrective action framework, and extend its supervision to NBFCs. Fourth, the government must give its banks more capital on the condition that they recognize NPAs correctly and clean up their balance sheets. Fifth, reform. The government should sell stakes in its banks to the private sector and let it run them; if it cannot, it should at least transfer its investments in banks to a holding corporation with an independent management. There is also a comprehensive programme to improve figures — a fiscal commission to look at the budget, an AQR, to be done by Raghuram Rajan, and a statistical commission, to be chaired by Abhijit Banerjee. Then, there is agriculture: replace fertilizer and power subsidies with direct transfers, create a single market for agricultural products, have a stable policy on agricultural exports and imports as well as on livestock, incentivize water conservation, and give permission to genetically modified crops.

Subralman are so concerned about economic policy even though they get nothing material out of India — no power, no function, no profit — because there is so much to be done, and the case for doing it is so strong. But it is difficult to see a government that abolished the planning commission and dismissed first-class economists understanding the need for good policy. The people have handed the present government the power to rule them; unless they change their minds, it is difficult to see a change in governance; expect a crisis and economic decline every few years. But whatever his idea of governance, the prime minister certainly makes a spectacular show of it.

State of the economy: Beyond hiccups

Dipankar Dasgupta
An eminent economist observed recently in a national daily’s blog that in spite of the Indian economy’s periodic hiccups, there is no serious threat to the system. “[H]istory,” he asserts, “should give us some pause as we assess the prospects of (the) Indian economy in the medium to long run. There is no denying that the economy is going through a rough patch. But let us not forget that we have been here before. There is absolutely no reason for the panic …

“At the heart of the current slowdown is the process of cleaning up non-performing assets... As the cleanup process progresses... growth is bound to pick up. In the meantime, the government should remain focused on its long-term reform agenda.”

The advice to the government to concentrate on the long run even as the economy appears to be gasping in the immediate present is reminiscent of the following, much quoted, remark by John Maynard Keynes in his A Tract on Monetary Reform. “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” The Tract was published in December, 1923, well before the onset of the Great Depression that produced Keynes’s all-time classic, The General Theory of Employment, Interest and Money (1936), a work that was concerned primarily with treatments of short-run problems afflicting free market economies.
The remedy Keynes suggested to resurrect ailing economies firmly emphasized the need for demand generation, primarily through public expenditure. In fact, he had explicitly questioned the effectiveness of monetary policy, such as interest rate reductions, to induce borrower-driven private spending to restore economic health. A lower cost of investment, he pointed out, was unlikely to stir up investment sentiments in a gloom surrounded economy.

The ineffectiveness of interest rate reduction has been amply demonstrated in the Indian case, since a series of repo rate cuts by the central bank has failed lately to prop up the growth rate. At the risk of missing out on the government’s fiscal deficit target therefore, many have suggested an urgent increase in government expenditure to boost production and flag off economic growth.

Direct government expenditure accrues as income to the private sector engaged in producing government demanded goods and services, assuming, of course, that demand is not met from unsold inventories of past production. These incomes, in turn, induce further private consumption expenditure, additional production and income and, hence, more consumption expenditure and so on. Keynes, as is well-known, termed this the multiplier, since the initial government spending creates a multiplied increase in expenditure and income. Most importantly, it increases production and short- term growth of the gross domestic product. Such increments in short- term growth rates, if sustained, average out into healthy medium-term progress.

The power of the multiplier process depends, though, on the strength of the propensity to spend out of income. If the propensity is weak, then the government expenditure may not have any significant impact. It is in this context that Michal Kalecki, a Polish economist, had an important message to deliver. Kalecki was several years younger to Keynes and a relatively unknown figure in the dominant English- speaking world of academic economics. However, he had anticipated the Keynesian theory described above, a fact that he himself pointed out in his Selected Essays on the Dynamics of the Capitalist Economy 1933-1970, an English translation of his works published by the Cambridge University Press in 1971. In the Introduction to the book, he writes that it includes “… three papers published in 1933, 1934 and 1935 in Polish before Keynes’s General Theory appeared and containing... its essentials”.

Kalecki, given his neo-Marxian background, had a version of the multiplier theory that was more illuminating than the one proposed by Keynes. He pointed out that in a capitalist economy, production generated two primary income forms — profits and wages. Profit earners typically represent richer sections of the economy, while wage earners constitute the poor. The poor tend to spend most of their incomes on consumption and save little, thereby adding strength to the multiplier. In contrast, consumption expenditure by the rich has a dubious connection at best with current incomes. These are largely independent of the inflow of extant profits or other incomes, most of which they save. For the expenditure income stream to have a powerful impact then, production technologies should be labour intensive.

Paradoxically enough, this implies that a blind reliance on bouts of government expenditure may not solve our problems either. What with the incredible pace of technological advancement, production processes are guided increasingly by artificial intelligence. Not that the latter is totally divorced from labour, but the quality of labour it depends on is fundamentally different from the labour that Kalecki or Keynes may have had in mind in connection with the multiplier process. India’s labour force is large (exceeding 400 crore, according to some estimates) and a vast majority of it is trapped in the informal sector. They are often referred to as unskilled labourers, not because they lack training per se, but on account of the fact that they are unexposed to the might of modern technology. The situation is ironic, since institutions such as the IIMs, the IITs and others produce graduates who are skill wise the envy of many developed nations in the world. Such highly educated workers do not lack employment opportunities. Besides, they belong to the affluent classes and resemble, expenditure propensity wise, the capitalists far more than Kalecki’s workers.

Even if short-run growth were to pick up therefore, through whatever means this goal may be achieved, it is likely to be characterized by joblessness. The job losers will mostly be unskilled workers or people whose families lack the wherewithal to purchase the super expensive education of our times. Under the circumstances, the West Bengal chief minister’s latest call for investment by micro, small and medium enterprises could well address a part of the unemployment problem, given that these industries are still dependent to an extent on low- skilled, labour-intensive technologies. However, it is not clear if those same MSMEs will have any major impact on the GDP growth rate.

The blog we started off with assured that history didn’t support a pessimistic view of the current state of the economy. Let us end up too with a historical digression. During the 1920s, the US stock market expanded rapidly, reaching its peak in 1929. Simultaneously, production declined and unemployment rose. The eventual market collapse was accompanied by struggling agriculture and large bank defaults. Economic subsidence in many other parts of the world shared similar features.

It is absurd surely to locate signs of a recession in India’s slowdown, leave alone the Great Depression. Yet, the situation is worrisome. The banking sector’s stressed loans have exceeded 12 per cent of total lending, the output of 8 crore industries has contracted, food inflation has spiked and consumer expenditure is limping. Lastly, the stock market dances joyfully as the GDP growth rate continues to decline.

Merrier events hopefully hide in the womb of the future. Till then quo vadis?

The author is former Professor of Economics, Indian Statistical Institute, Calcutta

The results of the NSO survey 2017-18 are truly bizarre

Surjit S Bhalla
Some results of the National Statistical Office’s consumer expenditure survey (CES) for 2017-18 have been leaked. It is hoped that the official release (not endorsement for the reasons enunciated below) of the unit-level data will follow soon, so that researchers, analysts, politicians and even former prime ministers can evaluate for themselves how bad the NSO data really are.

The previous NSO survey on employment (PLFS) estimated the population in 2017-18 to be 1,074 million, when even mathematically challenged individuals estimated it to be upwards of 1,300 million (actually 1,339 million). That error of a 265 million under-estimation is a national record for the highest under-estimation of such a basic number — most NSO surveys have under-estimated population by around 5-10 per cent. The underestimation in 2017-18 at 20 per cent is a record.

This under-estimation has consequences for a major policy variable of interest — jobs and job growth. The unemployment rate is not affected by the estimate of aggregate population; but the number of jobs is affected. Most scholars have estimated employment generated by the PLFS data to decline by around 18 million in the number of jobs in 2017-18 relative to 2011-12. This is according to the usual status of employment, a measure which counts both half-time work (employed for 30-182 days) and full-time work (employed for more than 182 days) as full-time employment. In a detailed (forthcoming) paper on employment, Tirtha Das and I find that the desired full-time jobs (defined as principal status) increased by eight million between 2011-12 and 2017-18 — an increase not that different from what was obtained in the high growth years of 2004-5 to 2011-12 (a 14 million increase, but over seven years).

It is much easier to count people as employed or not employed, than to ask about their monthly per capita expenditure. This is where the world record is on the way to being established. The CES survey for 2017-18 shows that the per person real monthly expenditure (mpce in NSO parlance and not income as mistakenly assumed by some) declined from Rs 1,573 in 2011-12 to Rs 1,514 in 2017-18 (data converted from 2009-10 prices to 2011-12 prices to make it consistent with other data)

In my book, Imagine There’s No Country, I had documented how there was a declining trend in the amount captured by the surveys over time. Household surveys (S) were capturing less and less of consumption as revealed by an alternative calculation — the national accounts (NA). While the two definitions (survey and national accounts) are not identical, they are broadly comparable.

The average S/NA ratio, around the world, was in the mid 80s in the 1980s, that is, if the NA estimate of per-capita consumption was 100, then the household survey would estimate it to be 85. It is worth remembering that the S/NA ratio in India in the 1950’s and 1960’s was upwards of 95 per cent. Too high to be true? In a manner of speaking, yes. For then, the household survey provided the estimate of consumption for national accounts.

But, with time, economies became complicated, and the national accounts data moved with the times, became more sophisticated and captured the trends in the economy much better than the surveys. Survey organisations like the NSO refused to move. In 1983, the S/NA ratio in India collapsed to 63 per cent from the high 70s level just a decade earlier. It was to be 30 years later (in 2012) when the world reached the low 60’s average.

That year (2011-12), India recorded a 55 per cent ratio for S/NA. Just six years later (2017-18), the S/NA ratio in India has collapsed to just 33 per cent — the second lowest ever recorded around the world for economies without hyper-inflation (when S/NA ratio really gets distorted) and with populations above 10 million. The worst ever was Nigeria in 2009 with a S/NA ratio of 27.2 per cent.

There is yet another comparison one can make. The two most recent consumption surveys in India, just six years apart, yield a decline of 22 percentage points. This is the second worst sequential decline in the world. The worst was Pakistan in 2001 when the S/NA ratio was 46.9 per cent, down 26.9 percentage points from the 73.8 per cent estimate recorded in 1998.

The secular decline in NSO has now persisted for some 50 years and marks a sad occasion for an institution that was a trend setting statistical institution in not only the emerging economies, but in the world as well. In the early 1950s, the world famous statistician P C Mahalanobis was its head.

I was privileged to be a member of the first National Statistical Commission of India headed by an internationally renowned economist Suresh Tendulkar. I was sent to Calcutta by Tendulkar to interact with the NSSO and to find out why the Indian S/NA ratio had sharply declined and what could be done to improve survey response. I met with little success and came back frustrated with the ancient techniques being followed by them.

The most recent statistical commission chairman, P C Mohanan, was a colleague. He has been quoted as not being surprised with the decision of the government to not accept the findings of the latest record-low NSO survey. His view is that the government is suppressing reports that are not “favourable”.

If I thought that the NSO consumption surveys were misleading and not acceptable in 2002 and 2006, I can be forgiven for thinking that the surveys are even less acceptable today. The results of the NSO survey 2017-18 are truly bizarre — a decline in average real consumption of 0.6 percentage per year between 2011-12 and 2017-18, when the NA consumption estimate is of a positive 5.8 per cent annual growth. As discussed above, the NSO estimate for 2017-18 is so out of the box that it is actually out of any (reasonable) ball-park. If the government does not accept the findings of the survey (as has been suggested by a recent press release) then a genuine reform of the NSO can actually begin. Even if it does not return to its previous glory, a reformed NSO can become a respectable institution. That will not be easy, but it is a path worth embarking upon.

I have been surprised by how many respected analysts have pointed to the “findings” of the NSO 2017-18 and are relating it to the slowdown in the economy in 2019-20. Some of these very same “analysts” were cheering the RBI/MPC a year ago when it raised the repo rate to 6.5 per cent in June 2018, the very last month of the 2017-18 survey. Their reason for cheering the MPC — growth was too high, so high that it was leading to high and accelerating inflation. Both views cannot be right, and it is worse than disingenuous to hold both views simultaneously. The so-called experts have to make up their mind — if growth was disturbingly high in June 2018, then it cannot under any stretch of the imagination be argued that the CES 2017-18 survey is even close to being right.

Not every government report should be accepted. Just like individuals fail exams, and editors reject papers (and columns), sometimes, institutions fail to produce a credible report. But, I do believe that the unit-level data should be released. Let the world, and experts, find out for themselves how truly informative and credible the NSO CES data really are.

This article first appeared in the print edition on November 27, 2019 under the title ‘Rebuilding credibility’. The writer is executive director IMF, representing India, Sri Lanka, Bangladesh and Bhutan.

This is India’s first ever slowdown at a time of political as well as macroeconomic stability

Harish Damodaran

Sharp and protracted economic slowdowns aren’t new to India. Since Independence, there have been at least eight episodes of significant GDP growth rate declines over two years or more — 1961-62 and 1962-63, 1965-66 and 1966-67, 1971-72 and 1972-73, 1984-85 to 1987-88, 1990-91 to 1992-93, 2000-01 to 2002-03, 2012-13 and 2013-14, and the current one from 2018-19.

The slowdowns till the Eighties were mostly a result of drought-induced agricultural contractions, wars or balance of payments (BoP) pressures. Shortage of foreign exchange for imports, even of essential materials or components and spares used in capital goods, besides austerity measures introduced after the 1962 Sino-Indian War, caused the first growth dip episode. Back-to-back droughts and a BoP crisis leading to the 36.5 per cent rupee devaluation of June 1966, likewise, precipitated the second downturn, while it was a combination of the 1971 Indo-Pakistan War and the 1972 famine in the case of the third. The Eighties saw three consecutive drought years — 1985, 1986 and 1987. Its impact on the broader economy was predictable, given the farm sector had a roughly one-third share in India’s GDP even at this point in time.

Only during the past three decades has agriculture’s role in bringing down or pushing up overall growth diminished relative to other macroeconomic factors. Thus, both the early-Nineties slowdown and the one in the last two years of the United Progressive Alliance (UPA) regime were preceded by “twin deficits” — on the fiscal and external current account fronts. The growth slump of the early-2000s during the Atal Bihari Vajpayee-led National Democratic Alliance (NDA) government had mainly to do with the aftereffects of the 1997 Asian financial crisis, the sanctions imposed by the US and other countries following the 1998 Pokhran nuclear tests, and the end of a mid-1990s corporate-driven mini-investment boom.

The current slowdown — GDP growth has dropped in every quarter from January-March 2018 down to July-September 2019 and showing little signs of recovery — is unique by contrast.

Firstly, it has taken place amidst remarkable political stability, with the unquestioned leader of a single-party majority government at the helm. This was not so with the UPA, Vajpayee’s NDA or the 1991 minority Congress government of Narasimha Rao. Narendra Modi’s popularity is probably rivaled only by Indira Gandhi. But she was a relative novice as prime minister during the 1966 devaluation and emerged as a truly strong leader only after the 1971 general elections, which were held before the economy went into a tailspin. One could similarly argue that Jawaharlal Nehru was well past his prime when India’s first major downturn happened. That leaves only Rajiv Gandhi, who took over after his mother in 1984. However, he never enjoyed the cult status or credibility that Modi today commands.

Secondly, this slowdown isn’t courtesy the usual “F” suspects — food, foreign exchange and fisc. Not only does agriculture account for hardly 15 per cent of India’s GDP now, annual consumer food price inflation, too, has averaged a mere 1.59 per cent between October 2016 and October 2019. There has been no BoP crisis either; foreign exchange reserves were, in fact, at a record $448.60 billion as on November 22. The Modi government may have deviated from the original schedule of reducing the fiscal deficit to 3 per cent of GDP, but the average figure of 3.7 per cent for 2014-15 to 2018-19 is much better than the 5.4 per cent during the previous five years under UPA.

The Modi period, if anything, has been marked by both political and macroeconomic stability. Nor has it been witness to “external” disruptions in the form of wars or oil price surges. Even the US-China trade conflict from 2018 is not comparable in its effects on the Indian economy to the 2008 Global Financial Crisis or the 2013 “taper tantrum”. In any case, it’s not as though India’s exports were really booming before 2018.

Unlike all the earlier downturns whose precursors/triggers were supply-side constraints in food and forex, macroeconomic imprudence or external shocks, what we are now experiencing is more of a “western-style” slowdown exacerbated by internal policy misadventures. At the heart of it has been the twin balance sheet (TBS) problem — of debts accumulated by private corporates during the investment binge of 2004-11 turning into non-performing assets of mainly public sector banks. A similar bad loan build-up did take place even in the mid-1990s, forcing the subsequent cleanup of bank balance sheets and deleveraging by India Inc that also impacted growth during the Vajpayee government period.

But the difference between then and now is how the TBS problem, despite being flagged way back in December 2014 by the former chief economic adviser, Arvind Subramanian, has been allowed to fester – and spread to sectors such as non-banking financial companies and real estate that have far more contagion effect than steel, power or textiles. Even worse is the self-inflicted wounds from demonetisation and the unprepared rollout of the goods and services tax (GST), hitting those who were least responsible for the TBS problem: Farmers, petty producers and MSMEs. Job and income losses in the informal sector has, in turn, depressed consumption demand, including for the products of listed firms and other organised players that were supposed to have benefitted from demonetisation and GST.

If indebted corporates, risk-averse banks and the more recent credit crunch resulting from defaults by the likes of IL&FS, Dewan Housing Finance and Altico Capital — these are threatening to spill over to other financial and real estate-linked entities — have come in the way of investment demand picking up, consumption also taking a hit makes for a gloom-and-doom narrative.

The irony, of course, is that all this comes at a time of great political as well as macroeconomic stability. This is, indeed, a first-of-its-kind slowdown in India, where food, foreign exchange, oil, war and other “supply-side/external” factors have had no role. And if economic history is any guide, Western-style slowdowns, which are largely about crisis of confidence, sentiment and “demand”, tend to be long-drawn-out affairs. Controlling inflation may be easier than getting consumers to spend and firms to invest.

This article first appeared in the print edition on November 30, 2019 under the title ‘A different downturn’. Write to the author at harish.damodaran@expressindia.com.

The current economic slowdown needs a multi-pronged response

Saugata Bhattacharya
India’s economic growth (gross domestic product) was at 4.5 per cent in the second quarter of the current financial year. Gross Value Added (GVA), which is actually more representative of economic activity, grew at 4.3 per cent. The second quarter growth is the weakest since the fourth quarter of FY13.

There are distinct features of the current slowdown which make it different from the ones in the past. First, multiple growth engines — consumption, investment, exports, credit — have all slowed down synchronously; earlier, one of these engines would offset the weakness in the other. As in the first quarter, the proximate source of the slowdown was the manufacturing sector. But, underlying this is a sharp deceleration of investment spending. The growth drivers were also quite concentrated, with a prominent source being government spending.

There was a modest revival of household consumer spending, but this might also be an outcome of high government spending.

Second, the previous slowdowns were more the result of supply shocks, while this one seems to be led predominantly by a weakness in demand. While the focus has been on the real growth slowdown, even more striking is the slowdown in the nominal GDP growth rates. Reflecting the changing dynamics of volume growth and inflation over the past three years, nominal growth halved to 6.1 per cent in Q2FY20 (over the same quarter a year back), compared to a drop of 2.5 per cent in real growth. This is a matter of concern since nominal growth shapes the behaviour of economic agents, consumers, savers and investors. Equally, this has implications for the policy response since multiple economic variables depend on nominal growth — for example, the most immediate effect is in the slowdown of the Centre’s tax revenues.

The services sector has held up better than manufacturing. While the industry growth dropped from 10 per cent in the June 2018 quarter to -0.5 per cent in Q2, the services sector only modestly decelerated from 7.5 per cent to 6.4 per cent. The concern regarding this persisting deceleration is of the manufacturing slowdown spilling over to the services sector, both in construction and particularly in transport, where the weakness is evident both in data and anecdotal evidence. From the demand side of national accounts, private consumption growth is likely to be as low (or lower) as the first quarter based on public data like auto sales and results of service companies.

Third, the earlier slowdowns seemed to be led by the real sector. This time, the problems seem to have originated in the financial sector and then spilled over to the real sector through mechanisms similar to Ben Bernanke’s model of a financial accelerator. The credit squeeze has played a large role in amplifying the factors decelerating consumption and investment. The RBI data showed a striking drop in the flows of funds from multiple lending channels, from Rs 7.4 lakh crore in April-September 2018 to Rs 91,000 crore in the first six months of this year. Bank credit growth has dropped to 8.5 per cent in October. How does policy respond to this situation? A clear path for a revival in growth is not immediately obvious. The second quarter growth was most likely the bottom, yet the initial signs of a revival in the third quarter are modest.

Monetary policy was the first responder, with multiple repo rate cuts, adding up to 1.35 percentage points and another possible cut in the ongoing meeting. Due to multiple reasons, including a large liquidity deficit till June that kept the cost of bank deposits high, transmission of these cuts into bank lending rates was limited. However, the emergence of surplus liquidity since July has accelerated the pace of cuts in fixed deposit rates, and increasingly into bank lending rates. The quantum of rate cut in this MPC meeting, and the communication on the scope for further cuts, as well as the growth and inflation forecasts will also guide lending rates.

To start a virtuous cycle of a revival of consumption-led demand for increasing capacity, government spending is crucial given the weakness in private sector demand. In coordination with monetary policy, the government should actively pursue a counter-cyclical fiscal stimulus though a large stimulus is constrained by weak tax buoyancy. A revenue source which is being aggressively explored is disinvestment. This might offset some of the tax revenue shortfall. Further, as of FY18, almost Rs 9 lakh crore of various tax dues were stuck, of which about Rs 7.8 lakh crore were under litigation. This pipeline needs to be quickly unclogged, even if it means larger haircuts for the government in interest and penalties.

The other fiscal stimulus which also needs to be accelerated is making expenditure more efficient through targeting delivery, plugging leaks, and rationalising overlaps in spending. The FY20 Budget had an “Output Outcome Framework” for the first time with metrics for evaluating outcomes of government spending. In tandem, accelerating securitisation of operational revenue generating toll and other road projects and using these funds and other offshore sourced investments to finish projects like the dedicated freight corridors and increasing spending on the Pradhan Mantri Gram Sadak Yojana will serve as an investment and growth multiplier.

Some calculated risks in micro-prudential relaxations of regulatory norms for bank lending to stressed sectors will add to the measures designed for reducing risk aversion in bank lending. The Centre’s proposals for a partial credit guarantee for pooled assets of NBFCs and a fund for last mile finance of incomplete residential projects need to be quickly operationalised.

The signature message from the October monetary policy was the decision to “continue with an accommodative stance as long as it is necessary to revive growth”. This understated statement — equivalent of the European Central Bank’s President Mario Draghi’s commitment to do “whatever it takes” in 2012 — should be the guiding imprimatur of policy communication.

The writer is senior vice-president, business and economic research, Axis Bank. Views are personal.

The RBI and government must do whatever it takes to end the demand slump

Harsh Gupta
Growth has sharply slowed — for Q1 FY19 it was 8 per cent while for Q2 FY20 4.5 per cent. A casualty of this is the debate on India’s official growth statistics as nobody credible seems to question them anymore. Moreover, we must remember that the average growth rate for the NDA between 2014-19 was at 7.5 per cent while under UPA-2 it was at 6.9 per cent.

The reason for the current slowdown is the massive credit bubble of the last decade bursting along with, and to some extent caused by, the high real interest rates over the last few years. Mortgage and fixed deposit rates almost a decade ago were marginally higher than now even though nominal growth has fallen by around 10 percentage points. With residential real estate in a crisis, the shadow banking sector is also in a crisis.

The fiscal deficit has reduced from 4.7 per cent of GDP in 2013 to 3.5 per cent in the last five years — yes, it will go up this year and if we combine with states and off-book items, the number is higher, but that has always been the case. One must adjust for not just the Food Corporation debt but also normalise for the latest Pay Commission’s calendar. The government must come clean on the fiscal gap and announce a more realistic consolidation

roadmap with enough space for counter-cyclical deficits and automatic stabilisers. Fifty bps of GDP is not enough during downturns. As Sri Thiruvadanthai of the Jerome Levy Forecasting Centre has pointed out, the Centre’s debt to GDP ratio was around 20 percentage points higher at the beginning of the last boom cycle in 2003-04. The government should, through PPPs and EPC combined with Toll Operate Transfer (TOT)/Infrastructure Investment Trusts, fund a $1 trillion of infrastructure over five years.

Inflation has largely remained below the 4 per cent target. Core and especially wholesale inflation have been falling. Further, a range of 2-6 per cent has to be treated symmetrically rather than treating 4 per cent as a de facto ceiling. The average CPI number of 4.5 per cent during 2014-19, which is in contrast to the inflation rate of 10.2 per cent during 2009-14. What the RBI should do is to come out with a real rates framework with a publicly-declared neutral rate. While inflation targeting should remain the primary objective, a modified nominal growth target can be used as a secondary input along with financial stability considerations.

It is important to recognise that the current economic slowdown is monetary-financial in nature and to that extent cyclical/demand-related. We’ve had a sustained period of high real interest rates combined with sluggish money supply growth. The final nail in the coffin came when the Monetary Policy Committee thought in July and August 2018 that inflation is likely to overshoot the target. Consequently, they increased the repo rates which resulted in a further increase in our real repo rates to 4 per cent levels. Soon we had the NBFC crisis trigged by the IL&FS episode and we are still picking up the pieces. Unfortunately, many believe that a mere 135 basis cut will be able to fix the situation. However, they ignore than inflation has averaged a 100-basis point lower throughout the year.

This means that real interest rates haven’t moved much while the real prime lending rates have gone up. If transmission isn’t happening, then we should expect aggressive front-loading of rate cuts with massive open market operations. India’s 10-year G-Sec yield is now higher than the latest quarter’s nominal growth rate.

The RBI governor mentioned he’s willing to do “whatever it takes”. He has to follow this up. The government for its part has to nudge small savings and deposit rates lower to help transmission. Our rupee debt being incorporated into global indices would help and so would the Indian government issuing dollar/euro bonds. We also need to give tax incentives for retail investors to buy government or other debt through mutual funds and exchange traded funds. We need all hands on board — now.

Gupta is a public markets investor and Bhasin is a Delhi-based policy researcher.

Waiving loans doesn’t end the distress

Rajalakshmi Nirmal
After the Yogi Adityanath government waived farm loans of about ₹36,000 crore for UP farmers, pressure has mounted on other States to follow suit. But contrary to common belief, debt waivers aside from possibly guaranteeing electoral victory, do little to alleviate the plight of farmers. Neither do they help kick-start the rural economy nor spur agriculture investment. In fact, loan waivers only compound the problems faced by farmers by tarnishing their credit history and restricting access to institutional credit. Worse, they create a moral hazard by disrupting the credit discipline among borrowers.

The solution lies in offering ways to improve farmers’ income — whether through better price for produce, introducing methods to generate non-farm income, or saving on costs of farming.

 

In the past
The first-ever nationwide farm loan waiver was announced by the VP Singh government in 1990 at a fiscal cost of ₹10,000 crore. Banks ended up paying a huge price for this as many borrowers started to default, in anticipation of more waivers. An ICRIER paper in 2015 entitled ‘Evaluation of Credit Policy for Agriculture in India’ makes a reference to the study of Shylendra and Singh in 1994 which showed that following the bailout programme, the loan recovery of Primary Agriculture Credit Societies in Karnataka fell sharply. It dropped from 74.9 per cent in 1987-88 to 41.1 per cent in 1991-92.

Debt relief packages destroy the credit culture. A World Bank research paper shows that for a standard deviation of one in bailout exposure, there is a 4-6 per cent decline in the number of loans. This study was done in 2008 after the then Finance Minister P Chidambaram wrote off a massive ₹50,000 crore of farm loans. What happened after the bailout was that banks reduced exposure to districts where the write-offs were high.

Reserve Bank of India data shows that non-performing assets in agriculture for commercial banks rose after the 2008 debt waiver programme. Between 2009-10 and 2012-13, NPAs of SCBs (in agriculture) rose from ₹10,353 crore to ₹30,200 crore.

The claim of the supporters of the bailout programmes that it has a positive impact on rural economy is also wrong, says the World Bank paper. “We used regionally disaggregated data to test for the effect of the bailout on rural productivity, wages and employment. Our results identify a precise zero for each of these outcomes.”

The study has shown a low spending multiplier from the debt relief programme. Debt waivers are bad for everyone: those who receive debt relief as also for those who do not benefit because they didn’t have any overdue loan, says another research paper (‘Borrowing Culture and Debt Relief: Evidence from a Policy Experiment’, April 2013). The first category of borrowers become defaulters in banks’ book, and are denied loans in the future. The other category of borrowers who are discontented because they didn’t benefit the last time, build hopes for a fresh waiver and stop repayments. For fresh loans , they then borrow from the informal sector at a much higher cost. 

 

Not much use
The recent experience in debt waivers in the country has not been good. In 2014, before the elections, both N Chandrababu Naidu’s Telugu Desam Party and K Chandrashekar Rao’s Telangana Rashtra Samithi promised loan waivers to farmers in Andhra Pradesh and Telangana. Both saw victory in the polls and implemented the waiver programme. But, given its massive scale — ₹40,000 crore for Andhra Pradesh and about ₹17,000-20,000 crore for Telangana — the States had to add many riders to the scheme. The loan waiver, finally, only compounded the problems of farmers. According to the National Crime Records Bureau, farmer suicides in Andhra Pradesh went up to 516 in 2015 from 160 reported in 2014, while in Telangana it rose by over 50 per cent, to 1,358 deaths in 2015.

Debt waivers offer only short-term relief. Also these do not offer any respite to the most underprivileged farmers who are seldom entertained by banks and end up borrowing at high interest rates from money-lenders. The data shows about 30-35 per cent of farmers in the country still depend only on non-institutional credit.

Debt waivers should be replaced by a comprehensive package for complementing the income of farmers. The respective State agri departments need to work with their agriculture universities and draw up a plan for improving the non-farm income of farmers through poultry farming, cattle breeding, or fisheries. They should help farmers make the choice of right crops and variety. Ways to reduce costs and improve farm productivity have to be brought in. Ensuring a good price for the produce is also important. E-NAM, the Centre’s flagship electronic national agri market scheme, is still stuck at various levels of implementation. Many States are yet to modify their APMC Act to create a single market for facilitating trade through e-NAM portal. 

 

The insurance angle
The crop insurance scheme is also one way to ensure farmers do not suffer losses because of crop failure. The new version of the scheme, the PM Fasal Bima Yojana, has achieved limited success. By covering largely only loanee farmers ( these are sold through banks that automatically debit the loan account with insurance premium), this scheme has turned to be more advantageous to banks than to farmers. Small tenant farmers under pressure from the high cost of lease rent and borrowing from money-lenders, are still unaware of this insurance. Even when loan waivers become necessary, as during a natural calamity, they should be directed only to small and marginal farmers.

An unconditional bailout for every farmer is an unnecessary burden to the exchequer, when large farmers are capable of absorbing the loss in most cases. Also, the Government should prevent bailout programmes becoming a disincentive for diligent borrowers to pay their dues. Offering credit at a lower rate the following year to good borrowers, for instance, can help reduce the moral hazard to some extent.