Robert Zoellick, president of the World Bank, spoke at a seminar at the LKY Institute in Singapore on Wednesday. In conversation later, he said that in government, it is always possible to assemble the best experts to analyse problems, but it is the few who attempt to move forward and get things done, irrespective of the processes, that make a difference. In response to the financial crisis, it is interesting to see how many more of such people appear to be there in the US, and how few here.
One has only to look at the responses by the US treasury and the Federal Reserve as an illustration. The $700 billion bailout was intended to purchase stressed assets—along the way, the treasury decided that it was going to recapitalize banks instead. The Fed has taken several unconventional steps to keep the economy afloat. The weekly balance sheet of the Fed, a public document, shows that liabilities have reached $2.25 trillion, a jump of $124 billion in a week, as it increases exposures to banks, insurers and mortgage providers. The focus is on getting the economy going—if necessary, bypassing the banks and giving credit directly to businesses and, perhaps, even to retail and consumers. Now that interest rates are close to zero, it can create infinite amounts of money. It is the only country in the world that can repay foreign loans in its own currency, and can therefore print as much money as it wants. The point to note is the ability to decide and take pragmatic decisions, even to the extent of financing the government on any scale they think necessary.
The first step to dealing with a problem is, of course, to recognize that there is a problem. The government in New Delhi was in denial for all these months, and it is only last week that RBI governor D. Subbarao acknowledged that there are serious downturn issues. The rhetoric in Parliament on Thursday about the loan waiver to farmers and the national rural employment guarantee programme cuts little ice, as these subsidies have only widened the fiscal deficit without any concomitant benefits in terms of consumer activity or additional productive investments. The government has also painted itself into a corner with little fiscal room for major initiatives. The stimulus package announced 10 days ago has been criticized as a damp squib—the pressure on banks to lend at lower rates will only affect their balance sheets, the infrastructure announcements have no time frame for implementation and the low-cost housing loans will benefit only those in the smaller towns.
Yet, it is not as though there are no opportunities. Inflation is falling on the back of dropping oil and commodity prices, and food prices are holding steady. With the interest rates in the US close to zero, the dollar is dropping in value, and RBI can breathe a sigh of relief over its forex assets. The volatility index in the stock exchanges is down to normal levels from its abnormal fluctuations, and one can see reasoned activity there at these levels. The political gains of recent state election successes and the smooth passing of the anti-terrorism Bills can be seen as opportunities to take some clear and practical decisions.
At present, the interventions have been conventional—tentative reductions of interest rates, promises of infrastructure spending and the like. Another package is expected. The problem is complex and requires new and out-of-the-box solutions. Let us take just one example here. It appears that job losses and the downturn have affected the small and medium industry, exporters and the service sector, including transportation, freight movement, and travel and tourism, seriously. It is middle India, which was growing so well in the last five years—carpet weavers, T-shirt makers, diamond cutters, lorry drivers, brassware makers and small businesses—that is facing the brunt of the downturn and closures. These are not one anyone’s radar, nor are there people willing to take bold decisions to address these concerns. In the short term, we could think of an immediate initiative that will take care of this section—an unemployment dole, or some skill upgradation training, or even temporary employment in alternative occupations. At the same time, the state governments have to be taken into confidence to revive these industries and enterprises—provision of credit, working capital and investment. Is it possible to revitalize the state financing institutions by direct provision of funds, even from the central bank, for this purpose? Can the cooperatives be funded to provide enterprise and even trade credit? Is it possible to guarantee loans by banks to working enterprises based on past track record?
There are many other areas as well. It is important to look at specific problems and implement pragmatic decisions. Too much analysis will make this downturn linger for a long time—much after the US has got out of it. I hope we have the people for it.
S. Narayan is a former finance secretary and economic adviser to the prime minister. Your comments are welcome at email@example.com