Confusion on Mint Street Growth was accorded a secondary position vis-a-vis the compulsion to check the inflationary pressure. But in this quest for downward movement of inflation, the economy got stunted. The upshot was that the people gradually lost confidence in the government’s ability to control inflation as well as ensure an adequate level of growth ~ GYAN RANJAN SAHA It would now be useful to attempt an honest appraisal of Mr D Subbarao’s tenure as the Governor of the Reserve Bank of India. He has earned the rare distinction of raising the policy rates 13 times. These upward revisions were effected to counter the burgeoning inflation rate. On every occasion, he would place the rates on a higher trajectory; the consistent explanation offered was that inflationary pressure needed to be eased. In retrospect, it becomes clear that there was a huge mismatch between the pious declarations for public consumption and economic realities. Almost echoing the RBI’s statements, the mandarins of North Block kept repeating the story of the Wholesale Price Index collaterally getting lower. Simultaneously, with each quarterly review by the RBI Governor, the Finance Minister, along with the Deputy Chairman of the Planning Commission and Mr C Rangarajan, himself a former Governor of the RBI and, presently heading the Prime Minister’s Economic Advisory Council would make press statements iterating the unfulfilled hope that the spiraling rate of inflation would be tamed in a matter of months. Sadly, this expression of wishful thinking failed to yield the desired results. The ultimate consequence of these revisions was a miserable deceleration of the growth rate over the last three years. Whenever the policy rates were hiked, we were told that the primary purpose was to control inflation and if growth was affected in the process, so be it. In other words, growth was accorded a secondary position vis-a-vis the compulsion to check the inflationary pressure. But in this quest for downward movement of inflation, the economy got stunted. The upshot was that the people gradually lost confidence in the government’s ability to control inflation as well as ensure an adequate level of growth. It was a vicious circle. There was hardly any fresh accretion to employment opportunities except in select sectors like IT and ITES. The manufacturing sector was particularly hit. The data released by the National Statistical Organisation presented a dismal picture. In fact, one did not have to wait for these figures; one could draw conclusions from the movement of stock market indices. In his earlier stint as Finance Minister, Mr Chidambaram had famously said that he did not lose his sleep over the gravitational pull of the stock market indices. True, a Finance Minister of a country like India with myriad issues arising every day need not do so. But one can ignore these facts only at one’s peril. Perhaps it would not be wrong to submit that the denizens of Dalal Street get the premonition of the state of the economy long before the watchdogs of government wake from their slumber. But in the process, valuable time and opportunity is lost to attempt a course correction. Irreparable damage is done to the image of the country and there is a tremendous loss of confidence of both the domestic as well as overseas friends. That brings us to the second phenomenon spawned by the hamhanded policies of the RBI Governor, who has just retired. Having failed to control inflation and having sacrificed the growth prospects of the country, lack of new investment had affected the export performance over several quarters. This brought in its wake a serious reduction in the export earnings of the economy. Concomitantly, the exchange value of the rupee suffered a drastic fall and policy-makers realised the imperative to set the exchange value at a desirable level. Mr Chidambaram had to make several trips abroad to urge foreign investors to do business with India. Thus forgetting the spectre of inflation for the time being, the focus was on current account deficit. The tune changed at RBI and instead of talking in terms of the comfort level of inflation, the new demon came to be identified as current account deficit. To address this fresh issue, the RBI has recently adopted certain drastic measures. But instead of tackling the problem, this has given rise to the same consequences as the perceived steps to control inflation had created. If the stock market indices are any indication, and it is worth repeating that they are seldom wrong, the economy is sliding fast downhill. There is no respite from the CAD pressure. The former Governor often attributed the crisis to the externalities impinging on the fall in export. It was also argued that India had been affected by the global turmoil. If that were the true reason, the value of the dollar would not have strengthened even if QE III is accounted for. Inherent internal forces have brought the country to this sorry pass. To shift the responsibility to other factors may be convenient politics but is hardly good economics which depends more on facts than fiction. The third area that merits our attention is the abject failure of the RBI to arrest the stress being suffered by the PSU banks. Mr Subbarao had laid emphasis on the provisioning norms which these lenders have to abide by. But there has been no let-up in the growing stress as would be evident from the quarter to quarter results of the banks. Additionally, following such strict norms has led to a distorted bottomline much to the disappointment of the minority shareholders. As a regulatory institution, the RBI has to formulate and periodically tweak the provisioning norms; it has to exercise its oversight machinery to be aware of the incipient deterioration of the “asset quality” of the banks. The RBI has failed on this count as well. When the consortium of the banks were merrily extending finance in liberal dollops to the sick Kingfisher Airlines which “consumed” about Rs 8000 crore of the depositor’s money, was there a system of control in place? Were the banks alerted in time to desist from such operations? This ranks as a classic case of locking the stable when the horse had bolted. To borrow a felicitous expression used by a columnist in The Economist recently, India is fast hurtling towards what is medically termed as “financial incontinence”. The country direly needs remedies that will ensure growth, investments and savings. The new resident of Mint Street will hopefully chart new economic frontiers for the country.
Posted on: Fri, 13 Sep 2013 19:17:18 +0000
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