The suave RBI Governor, Dr Raghuram G Rajan, has given a piece of his mind by unequivocally underscoring the importance to break “the spiral of rising price pressures in order to curb the erosion of financial savings and strengthen the foundations of growth”. Instead of shooting the messenger by sidestepping the message, the ruling dispensation should do intense introspection to improve the prospects for a sustainable turnaround of the economy from its ills and travails ~ G SRINIVASAN
The RBI&’s mundane second quarter review of monetary policy, released on 29 October, has predictably raised the repo rate by 25 basis points and normalized exceptional monetary measures to inject more liquidity into the system. More important, however, is the apex bank&’s account of the state of the economy and how things would play out in the second half of the current fiscal. The wisdom emanating from Mumbai&’s Mint Street, where the Reserve Bank of India (RBI) is located, is always viewed with fervour by key players of the economy in general and the authorities in particular who may not relish its blunt statement of facts that are couched in elegant language to reveal most of the rot than conceal the obvious truth that the economy is in a rut and its management in a shambles.
The UPA dispensation, with renowned former Union Finance Minister Manmohan Singh as the Prime Minister for a second term in a row, appears to be heading for the worst legacy compared to the era in which the outsider from the family ~ Narashima Rao ~ was the Prime Minister. The latter did sterling work to unshackle the caged tiger to strut with respect on the global stage from the early to the mid-1990s. When governance is not the direct responsibility of the Prime Minister with the party president Sonia Gandhi setting the agenda of welfare schemes as the trope of the times, both the Prime Minister and the Finance Minister ~ with considerably narrowed latitude compared to the Prime Minister ~ could do much. To compound the cup of woes for both, coalition compulsions had effectively abridged them of any policy autonomy and even made them skirt or pass unnoticed when a lot of skeletons and shenanigans tumbled out of the cupboard that covered questionable award of coal blocks, spectrum, conduct of Commonwealth games and the housing scam in Mumbai. With the ruling party&’s council of ministers, including the captain, remaining impervious to all allegations, the bureaucrats too saw little virtue in taking administrative decisions. Both the wings of the executives further muddied the waters when Parliament could not legislate any important legislation, thanks to the motley numbers of Opposition parties, each of which has its own axe to grind in grinding the system to a halt. It is small wonder that the economy, rated once as the emerging one, seems to be submerging in a slowdown mode for the third year in a row this fiscal.
So when a sensible institution such as the RBI is adopting a hawkish monetary policy not to exacerbate inflation from galloping, it has to concede as it did in the latest review that it “has been adopting a judicious mix of policy under a difficult macro-economic scenario of high inflation, low growth and financial fragilities”. Against the post-crisis growth of 8-9 per cent that the Indian economy notched up even as late as 2009-10, the RBI estimates the gross domestic product (GDP) growth for the current fiscal to stay at about the level of last year which was 5 per cent. In fact, growth has slackened to a 17-quarter low of 4.4 per cent during the first quarter of 2013-14 and with the manufacturing (industry) sector showing no sign of any pick-up and hovering over less than one per cent growth throughout the first five months of the current fiscal, a major slice of growth momentum is likely to come from a rebound in agricultural growth. But the extended monsoon in several parts of the country had already put paid to the hope with vegetable, dairy and poultry prices hitting the roof because of their perishable nature in wet weather and logistic problems. The final estimates of kharif and rabi crops for the crop year will reveal the reality later.
Be that as it may, the central bank has said in no unmistakable terms that it would be necessary to secure macro-economic stability sooner rather than later; failure to do so can result in a lasting “growth collapse”. With assembly elections to a few states in the coming weeks to be followed by the 2014 General Election in May, will the mandarins managing the affairs of the economy from North Block take measures to rein in runaway consumption expenditure including unmerited subsidies on fuel (both diesel and petrol) when national oil marketing companies groan under the heavy burden of under-recoveries, despite modest and meager adjustment in prices. Fuel inflation is going to fuel high inflation in terms of making the transportation of goods and services across a wide swathe of the economy costly. The RBI has conceded that persistence of inflation in the second half (October-March) could “arise as high food and fuel inflation exert some cost-push pressures on manufactured product prices and as high wage inflation feeds through to general level of prices”.
That the UPA government is reckless in reining in deficit, both fiscal and revenue, is axiomatic especially when the deficit indicators of the central government widened markedly during the first five months of 2013-14. RBI stated that low growth of the Centre&’s tax revenue on the one hand and a significant spurt in revenue expenditure on the other increased the revenue deficit, which has already reached 87.4 per cent of budget estimates. This coupled with higher capital expenditure resulted in a gross fiscal deficit of 74.6 per cent of budget estimates during the five-month span, which is the highest in the last five years. This is despite the commitment of Mr. Chidambaram to stick to the budgeted 4.8 per cent of the red line he drew for the whole year. Even as tax revenues took a knock because of the slowdown of activity in the economy among the real sectors, the glacial pace of disinvestment this year at Rs 1.3 billion, as against Rs 400 billion target in the budget, reveals the gaping chasm to bridge. A sensible way out to get over this gap, according to the RBI, is through payment of higher dividend by cash-rich public sector units. Further, some of this cash could be utilized by these PSUs to boost public investments in their areas of operations depending on capacity creation needs and expected rate of returns.
This suggestion has also been expressed by the Prime Minister&’s Economic Advisory Council Chairman, Dr C.Rangarajan, but it is left to gather dust in the PMO as no concrete proposal appears to be on the anvil.
The RBI review, while conceding that containing fiscal deficit in 2013-14 within the budgetary limit could be a challenge for the government, has stated that fiscal multipliers for capital outlay are found to be significantly higher than that for revenue expenditure. Therefore, it has suggested fiscal consolidation with a reorientation in expenditure from revenue expenditure to investment spending could be growth-supportive as it will also attract private investment. This together with complementary action aimed at productivity-enhancing structural reforms, addressing supply constraints and ensuring quick project implementation would be necessary for unleashing and underpinning growth impulses in the economy.
The suave RBI Governor, Dr Raghuram G.Rajan, has given a piece of his mind by unequivocally underscoring the importance to break “the spiral of rising price pressures in order to curb the erosion of financial savings and strengthen the foundations of growth”. Instead of shooting the messenger by sidestepping the message, the ruling dispensation should do intense introspection to improve the prospects for a sustainable turnaround of the economy from its ills and travails.
The writer is a Delhi-based journalist and can be contacted at [email protected]