Miss
Otis Regrets
Cole Porter wrote a haunting song in 1934
about one Miss Otis who could not come to lunch because of a grisly back story.
But it is paradoxically a very genteel and poignant song, with the nastiness of
the back story quietly peeking through.
The story of India’s economic mismanagement
via the erstwhile trio in the Finance Ministry, The Planning Commission and The
RBI, with the PMO just watching mutely, has been truly appalling. All these
institutions, headed by supposedly eminent and capable people demonstrated a
spectacular incompetence not known in the post 1991 scenario.
They were, in hindsight, all out of touch
with reality, all hugely impractical, wrong in trying to force -feed socialism
after its expiry date, ignoring the engines of growth and development, while
stoking and compounding each other’s folly. It was indeed enough to form quite
the ghastly back story.
The remaining overlap now is only in the RBI, for the other captains have been turfed out by the electoral tsunami. The Reserve Bank is still topped by a celebrated and much qualified governor with strangely regressive views.
The RBI has for long, since 2008, been a
one trick pony focused solely on curbing inflation. This took a vibrant economy
and killed it slowly in anticipation of an overheating that never actually
came. While keeping prices down may be a laudable objective, a ham-fistedly
tight monetary policy from the RBI, combined with Government welfarism paid for
with deficits, is hardly a winning combination. Still, it is all that has gone
on with little or no success to show for all the pain, either by way of lower
inflation, or the plight of the poor salvaged.
What has happened instead, in the bitter-pill
process, is that a once vibrant economy has been reduced to a state of
stagflation. Industry has almost died, and to prove it posts negative growth
statistics month after month. Job creation is arrested, and the job market has
actually been shrinking. This, even as lakhs of qualified young people from our
vaunted ‘demographic dividend’ come on stream every year.
It was speculated, once the election
results came in, that the highly qualified present incumbent at the RBI, Governor
Raghuram Rajan would have to blend his arcane American style central banker
nostrums to tame inflation, with those that unequivocally promote growth. And
that too even before he got around to signing any currency notes for posterity.
But having seen the size and heft of the
BJP/NDA’s electoral mandate, the governor has decided to play ball, however
reluctantly. He has, willy-nilly, stopped hiking interest rates in his latest
review, and started loosening his grip on liquidity, albeit in much too timid a
fashion to delight anyone in industry or commerce. But yes, cutting the
Statutory Liquidity Ratio (SLR), the amount the banks must keep in Government
bonds, by a half per cent, will release some Rs. 39,000 crores for lending.
Despite the rigmarole and keeping up of
appearances, the autonomy of the RBI is something of a myth, because no governor
of the RBI can in practical terms stand apart.
The RBI is allowed to do the bidding of the Government of the day, no
more, no less. And this Government, is determined to kick-start the economy to
bring in the promised ‘acche din’ asap and in no uncertain terms.
The right place to fix inflation may well
be outside the purview of the RBI, down in the engine rooms of the fiscal
deficit. Common knowledge has it that the fiscal deficit, the difference
between the expenditure of the Government, at 30 per cent of GDP, outstrips the
revenue all told, which comes in at 22 per cent. This eight per cent gap needs
to be bridged pronto.
This can be done most positively by raising
the GDP and containing or cutting Government expenditure from current levels.
The rise in the rupee and growing our foreign exchange reserves also helps, as
it reduces our import bills.
Our GDP in real terms is under $ 2 trillion
if one combines the official and unofficial economies. But since most statistics
are based on the official economy, our GDP is in the region of just $1
trillion. Despite this modest sum, India is still counted as the 10th
largest economy in the world in real terms. Should this GDP go up to $ 5
trillion, as some foreign bankers are suggesting, due to reforms, development,
growth etc., then we would be the world’s 5th largest economy. The
foreign bankers suggest this could happen by 2025, but actually it could happen
in a lot less time if the Modi Government really pushes growth.
Another report from AT Kearney says FDI has
been declining, from $31.6 billion in 2011 to $ 25.5 in 2012 and that India has
slipped to its lowest position in their foreign direct investment index. The
Modi Government wants to up FDI to $ 50 billion in its first year in office, to
both double the inward flow of 2012, and stem the rot.
The RBI, on its part, needs to get in step
with economic ambition of this order, because the Modi Government is unlikely
to resemble the UPA and its confused policies in any shape or manner.
(874
words)
June
3rd 2014
Gautam
Mukherjee
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