RBI’S NOTE OF CAUTION
Karl Marx wrote: “Britishers were the unconscious hands of history to promote economic development in India”. In similar vein after the RBI called the bluff on demonetization, Mr. Modi has become the unconscious hand to help black money hoarders to turn them into white! It’s refreshing to find that the RBI has finally flexed its muscle. It’s refusal to reduce repo rate is in sharp contrast to Prime Minister’s rhetorical assurance to the Company Secretaries that India will witness a growth of 7.7% during 2017-18. The RBI has brought out that the gross value addition (GVA) to increase by 6.7%, a drop by 0.4% of its projection of 7.1%. In a remarkable congruence of viewpoint, the Economic Survey published by the Ministry of Finance, has also projected India’s growth rate around 6.75%. Such cautionary stance is understandable as the private sector investment stands fixated at 17.5% and the manufacturing sector shows a clear slow down. While the RBI is trying to clear the cobweb of rising NPAs, Mr. Viral Acharya, the deputy Governor is candid enough to admit that it will take 12-18 months at least before the initiatives taken to deleverage them through the Insolvency and Bankruptcy Code would fructify.
The RBI Governor in his press statement has also cautioned the government against any further move to increase the fiscal deficit which stands perched at a high level of 6% for Centre and States combined. He has noted with concern how the spate of loan waivers in States like UP, Punjab, Maharashtra and Karnataka has increased the fiscal deficit by 0.5%. A fall out of such waivers by the states is reduction in their capital expenditure, which will seriously affect creation of new assets, infrastructure and employment opportunity. The Centre is also remiss on this account, as the actual capital expenditure is falling short of the initial outlay by 7%.
Prof. Kenneth Rogoff and Prof. Carmen Reinhart in a seminal study (2012) had brought out how countries having debt beyond 90% of the GDP witness very low growth. The experience of Greece during 2013-14 with 160% debt and its crisis is testimony to that. With Centre and States having 66% debt India’s policy makers will be well advised not to adopt a profligate fiscal policy. Mr. N.K. Singh, committee on FRBM Act has also recommended that the fiscal deficit should be brought down to 40% by 2022-23. The RBI Governor has rightly reiterated cautionary fiscal stance.
The other two aspects where the RBI Governor has highlighted the need to be cautious are about likely inflation and improving the method of loan pricing by the banks. The RBI expects the inflation in the second half of the present fiscal year to be in the range of 4.2 – 4.6% as against the earlier estimate of 4.0 – 4.5%. This is based on hardening of non food prices, fall in Kharif prospect and likelihood of a spike in transported oil prices.
The loan pricing via external benchmark is a novel suggestion made by the RBI, based on a study report relented by Mr. Viral Acharya. As per this study, the Marginal Cost of Lending Rate (MCLR), a scheme which was introduced by the RBI in April 2016, has failed to achieve the objective of easier and faster transmission of rates to the borrowers. It may be recalled that the banks have been passing on only 50% of the repo rate reduction by the RBI to their customers in the past by keeping the MLCR as high as 9.45% in April 2016. The report has brought out that it has come down to 8.5% in August 2017, which is very marginal compared to the repo rate reduction since then. This is because of the high degree of discretion available to the banks. They have accordingly suggested that there is a need for loan pricing via an external agency and global benchmarking which will create greater transparency and bring down the loan rates. While the RBI will take a final view on this by end October by taking feedback from all stakeholders, this is a welcome recommendation, as cost of borrowing is quite high in India, compared to other emerging market economies.
India is presently passing through a phase of growth which is completely out of sync with the experience of other developed and EMDEs. The US and Euro zone have expanded, as has the Japanese economy. China has received a boost from robust domestic demand; thanks to depreciation of Yuan. The World Economic Outlook (April 2017) has pitched world growth to increases from 3.1% to 3.5% in 2017 and 3.6% in 2018. It is, therefore, disturbing to find that India is missing out on the global party in which it was touted as the “only bright spot”, not go long ago.
C.P. Scott, the British journalist, during the centenary celebration of the Manchester Guardian had observed “Comments are free, but facts are sacred”. India today is witness to a curious spectacle where comments from even the discerning seem to obfuscate facts. The RBI Governor must, therefore, be complimented for bringing out the hard facts of the Indian economy, after releasing the annual report a few months ago, where it had unmasked the extent of black money after demonetization. Monetary instruments are quite limited in their efficacy to contain economic slowdown. Economic depression in 1930s and the financial crisis during 2007-08 have demonstrated this amply; clearly underpinning the Keynesian suggestion to ramp up public investment significantly. There is also a strong case for privatizing the public sector banks, so that they perform on professional lines. India needs to also improve its Tax/GDP substantially from its present 11% level to at least 16% to achieve its objective of boosting its public investment. We need a border base of taxation as tax evasion is rampant. Besides, a high rate of taxation for the super rich is urgently called for. In the prevailing economic milieu it is better to go by hard facts and be fiscally prudent than to indulge in irresponsible rhetorics on India’s growth story!
The author teaches Constitutional law