When the Greek hero Ulysses was homeward bound after the Trojan war, he had to sail past the island of the Sirens—enchantresses who by their sweet singing lured travellers to their doom. But Ulysses had been forewarned by the goddess Circe and he took preventive measures. He stopped the ears of his sailors with wax, so that they would not hear the songs of the Sirens, while he instructed his men to tie him tightly to the mast of his ship, so that he could not break his bonds. Even so, the Sirens’ crooning was so seductive that Ulysses begged his men to untie him; but they knew the dangers and bound him tighter. And that was how Ulysses and his men escaped the Sirens.
Whether Prime Minister Narendra Modi is a modern Ulysses, “strong in will/to strive, to seek, to find, and not to yield”, is debatable. But he is in similar danger. There is no shortage of ‘Sirens’ who want him to provide a stimulus to the economy. The business lobbies, the government’s chief economic adviser and even the finance minister are singing the siren song of higher fiscal deficits, with chief economic adviser Arvind Subramanian turning out to be the leading siren. Others of their ilk have been warbling and cooing about a monetary stimulus, provided by lowering interest rates. Arvind Panagariya, chief siren at the Niti Aayog, has been loudly banging this enchanted drum.
Thankfully, we now have someone to play the role of Circe, who can warn the prime minister against these ‘seductive sirens’. True, comparing Reserve Bank of India (RBI) governor Raghuram Rajan with Circe may be stretching things a bit, not least because she transformed people into swine, a course of action Rajan has so far refrained from emulating. But, in a superb speech last Friday, he issued dire warnings about the dangers of succumbing to the blandishments of taking the slippery path to temporarily higher growth, through loosening the fiscal and monetary purse strings.
Why, if India is the fastest growing economy in the world, do we need a stimulus? Rajan’s warning was stark: “It is at such times that we should not be overambitious.” Pointing to the mess Brazil is in after indulging in ill-advised monetary and fiscal extravagance, he cautioned, “As Brazil’s experience suggests, the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies. We should be very careful about jeopardizing our single most important strength during this period of global turmoil, macroeconomic stability.”
He pointed out that the combined fiscal deficit of the centre and the states in India is far higher than in comparable countries, with Brazil, tellingly, being the sole exception. He spoke of massive extra financing needs as a result of the government’s Ujwal Discom Assurance Yojana (UDAY) scheme and stressed the importance of retaining the confidence of the bond markets.
That’s not all. Rajan was equally forthright about a monetary stimulus, resisting calls for altering the monetary policy target and making it clear he had no intention of departing from the inflation framework that has been agreed between RBI and the government. Talking of Brazil, he said the central bank was pressed to reduce interest rates there in order to help higher growth, which fuelled a credit boom and, now, over-indebted borrowers are struggling to repay their debt. He underlined that, “macroeconomic stability relies immensely on policy credibility, which is the public belief that policy will depart from the charted course only under extreme necessity, and not because of convenience”. This is a time to be cautious, susceptible as we are to global financial shocks.
On the other hand, lower oil and commodity prices have opened up a window of opportunity for the economy, a chance to go in for tough structural reforms. The laundry list is long: food and fertilizer subsidy reforms, rationalizing the tax system by removing concessional rates and exemptions, cleaning up the real estate sector, boosting agricultural production that will ensure food prices don’t rise with every increase in rural wages, selling off government-owned firms, clearing up the mess in the banking system, removing barriers to trade and creating one national market for the entire country, upgrading infrastructure, increasing productivity, improving the quality of human capital, overhauling the bankruptcy law, changing land and labour laws, making the courts work better. As James Joyce said in another Ulysses, “Longest way round is the shortest way home.”
True, the government is moving on some of these issues. Note, though, that recently the centre ordered the tea board to take over the management of seven ailing tea gardens in North Bengal. Maharashtra recently backtracked in amending the notorious Rent Control Act. These are not good omens. The centre has made little headway in its promise of minimal government—if anything, the pointers seem to be in the direction of more, not less, government control.
Structural reforms will not yield instant results—indeed, they could increase uncertainty. But as Rajan said, “I am reminded today of the period 1997-2002 when India laboured and reformed with only moderate growth, only to see a decade of high growth after that.”
Will the government fight the temptation for quick fixes and stick to its fiscal consolidation time-table? Will Modi tie himself to the mast and resist the call of sirens? Admittedly, the signs and portents at the moment do not seem propitious.
Manas Chakravarty looks at trends and issues in the financial markets. Comments are welcome at firstname.lastname@example.org