Financial Cul-de-sac

Eighty years back, John Maynard Keynes wrote “The boom and not the slump is the right time for austerity at the treasury”. As Indian economy gropes in recession, with GDP numbers plummeting to 6.1% and 5.7%, during the last quarters, the echo of Keynes for fiscal stimulus could not have been more timely. India is indeed in the cusp of an economic paradox, where most of the economic fundamentals are in the right trajectory, while output and employment show a downturn. We had good agriculture growth (5%) after a sticky record of 2.5% growth, low inflation (3.5%), high FDI inflow of $60 billion, low balance of trade deficit (-1%) and a fiscal deficit which is within FRBM target of 3.2% of the GDP. On the other hand, growth in bank credit is plummeting from around 12.8% in 2013-14 to 7% and industrial growth is stagnant. Most importantly we are going through “Jobless growth”. As per the assessment of the CMIE, India lost close to 1.5 million jobs, as an after effect of demonetization, which crippled the informal economy, farming, and the small scale sector. It’s time we come out flogging the dead on demonetization and look at the realistic options which can take the economy out of the present financial cul-de-sac.

There is a heated debate as to whether India should abdicate fiscal austerity as dictated by the FRBM Act, or we should bolster public investment by breaching the fiscal deficit ceiling of 3.2% for 2017-18. The other debates are on appropriate repo rate by the RBI, depreciation of India rupee and how to rev up the sleeping “animal spirits” of the private investors.

The classical Keynesian prescription during the economic recession 1930s was for government to lead the way through public investment, without being overly concerned by the quantum of fiscal deficit. This led to two New Deal Programmes by FDR in USA (1932-1944), creating a vast multipurpose hydro project in Tennessee Valley (TVA) and public works programmes. This reduced unemployment from a level of 30% (1930) to 2% by 1944, and made USA, the leading global economic hegemon, post World War II. The Keynesian fiscal policy became the leitmotif in USA and Europe, prompting Ricard Nixon to observe in 1971 “We are all Keynesians now”.

The 1970s changed it all. The oil price hike, huge military expenditure in Vietnam and rampant consumerism brought in “stagflation” to USA when recession combined with high inflation. This brought in Milton Friedman, for whom reduction in money supply was the key to curb inflation. Paul Volker, as the Federal Reserve Bank Governor (1979), used high repo rates to slay the demon of inflation from around 13% to 3% by 1983.

In India, post 2008, Mr. Subbarao, the RBI Governor, followed Volkerism and increased repo from 6.25% in 2005 to 8% in June 2008 and then to 8.5% (2012). The GDP growth came down to 3.9% and 5.5% respectively, while inflation remained high at 8.3% and 9.3% respectively. On the contrary when Mr. Raghuram Rajan brought repo rate down to 6.75% in (2016) based on CPI trends, inflation come down to 4.97% and 7.1% growth was witnessed during this period.

The government has now put in place a Monetary Policy Committee by amending the RBI Act which combines credit control with growth as inter twined objectives. The repo rate was brought down to 6% in the last review (August 2017). The redeeming experience for India has been a coalescence low repo rate with low inflation. However, the growth rate has taken a downward journey from 7.5% (October 2016) to 5.7% (June 2017).

Repo rate is an important cog in the wheel of investment. However, private sector in India today is hemmed around with myriad problems, prominent amongst which is high indebtedness of the public sector banks. The government has inked new Bankruptcy Code (2016) to settle outstanding dues expedititiously. However, the only way to sort out the twin balance sheet problem is considering “haircuts” for past NPAs which have grown from 4.4% (2014) to around 9.3% (March, 2017). This is an extremely tricky terrain for the government as it is wary of a backlash from oversight agencies like the CAG, CVC and the Courts, because of allegations of favoritism.

But what is clearly doable for the government is to increase its allocation for infrastructure for 5% to 10%, and improve overall public investment for 7.5% to 15%. There is also a need to improve the momentum in the manufacturing sector. The National Manufacturing Policy (2011) envisaged an increase in the share of manufacturing in GDP from 16% to 25%. It also foresaw creation of additional employment opportunity of 10 million a year. Sadly the envisaged manufacturing zones are moving at a snail’s pace because of the delay in the Industrial Corridors. Land acquisition has become a major bottleneck. Prof. Isabelle Joumard in a perceptive analysis has brought out how Chinese productivity is 1.6 times as high as India and unorganised sector accounts for 66% of employment as against 9% in China and Brazil. She also brings out how as against 11,000 ITIs in India, China has set up 5 lakh ITI, making its workers skilled on a massive scale to improve its manufacturing foot prints and becoming global manufacturing hub. Skilling on a large scale, better quality education, and declogging constraints in land acquisition and labour regulation can energize the manufacturing sector.

There is also a strong case for devaluing our rupee by around 10%, as it has been brought out by the Economic Survey that rupee has appreciated vis-à-vis dollar by around 7%. India witnessed a significant deceleration in its exports last year by -11%, which has now picked up. In order to become competitive in the global market, the rupee must not prise itself out due to its artificially high rates. China devalued Yuan last year, bringing with it a surge in its exports. While repo rate can be a useful tool for improving credit off take, what would be really potent for bolstering private sector investment, would be significant increase in public investment (15%), improvement in infra spend (10%) and hair cuts for defaults in loans taken. Prof. Rosenstein Rodan had advocated that developing economies must eschew incrementalism and go for Big Push.

Finally, it’s time that the present brand of corporate backed communal fascism that promotes hatred must be stopped. Richard Hofstadter’s in a wonderful book “Anti Intellectualism in America” brought out how McCarthy and his henchmen worked to deprive independent thinkers and writers of their jobs in the 1950s. Hofstadter has highlighted how the diehard Republicans after the victory of Eisenhower in 1952 used to call the intellectuals “conceited, effeminate, cowards and subservient”. The ultra right in India, also consider the likes of Dabholkar, Pansare, Kalburgi and Gauri Lankesh as “antinational” and go to the extreme length of ending their lives. The script of India’s economic blueprint cannot be written by its industrial and infrastructural initiatives alone but by the ways that healthy debates and responsible dissent form a part of our democratic discourse. The cold logic of economic rationality cannot supplant the moral compass that must envelop the ethos of a liberal democracy like India.

By Satya Narayan Mishra

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