I always thought I would be able to see the bright side of things in economic management, but increasingly my vision is of the dark at the end of the tunnel, thanks to the news that is coming in every day. We are now told that the cost for the farm debt waiver would be much greater than anticipated, and several of my friends in rural areas, who are otherwise not so badly off, have told me that their bank manger had called them and told them that in order to meet his waiver targets, he was reclassifying their jewel loans as agricultural loans and writing them off.
I have gone through the detailed instructions of the finance ministry on this scheme, and am quite convinced that it has large loopholes for even elephants to pass through. I have no problem with direct cash transfers for the poor — in fact, I have been advocating this as a policy to replace all the leaky and corrupt schemes — but it bothers me that we cannot put together a scheme that takes into account the ground-level conditions and ensures that delivery losses are minimized. The loan waiver is likely to turn into a bottomless pit, with claims continuing to come in long after the final date announced by the ministry, and we shall never see the final figures until the comptroller and auditor general brings them up two or three years later.
We are also told that very large sums have now been set apart for the payments under the pay commission awards to government staff. This would be interesting on several counts — first, as the Budget, in an attempt to be clever, made no provisions for these payments, any large sums would need to be voted by Parliament, an iffy proposition in these troubled times. Second, since no one is happy with the recommendations of the commission, there has to be a mechanism to examine these claims and take decisions, a difficult proposition if the government is reduced to a minority. Third, the actual payments would entail substantial increases in borrowings, in the fiscal deficit, in liquidity and, therefore, in inflation. At the same time, if these grants are not made, it is goodbye to the votes of the government staff, especially the uniformed personnel. It’s easy to understand the dilemma of the government, and also easy not to sympathize with it, for it had it coming for over a year, with the writing on the wall very clear on inflation and liquidity.
Finally, I cannot understand the need for self-flagellation in putting out inflation numbers every Friday — numbers that the ministry admits are incorrect and not based on adequate reports. It should be very easy for the government to say that it’s looking at the statistical base for these numbers, and they would be put out once a month. I have not come across any other country that whips itself every Friday.
Even at this time, there are options available to the government to get things back on the rails. As the rupee weakens against a weakening dollar, we are importing inflation hand over fist. Oil at $146 will be costlier if the rupee has also fallen during this time. Payments for commodities and imports are squeezing liquidity out of the system and the huge increases in government borrowings will make commercial credit dearer and interest rates higher without doing much for inflation. As a columnist wrote, cash reserve ratio and repo rates of more than 8% while inflation is at 11% still mean a negative interest rate, and will have little effect on inflationary pressures. It might make more sense to go for a strong rupee with the Reserve Bank selling dollars to let the rupee appreciate. The additional liquidity could easily be absorbed by government and by the industrial sector.
At the same time, it is necessary to get confidence back into industry and services to provide for growth and export opportunities so that the economy can continue to grow. Investments in power and other infrastructure are an obvious choice, as also the quick approvals for mining and extraction of minerals. There are industries that are export-oriented, which can take this opportunity to get into, and grow, in non-traditional markets. It would be easy to conceive a credit, export and technology facilitation programme for these industries while continuing to keep credit tight for those sectors such as real estate which contribute to inflationary pressures. Apart from mining, one can think of light engineering, drugs and pharmaceuticals and textiles as some of the sectors which could be incentivized through monetary and fiscal concessions to grow.
Finally, this is also the time to push through the skill upgrading programmes announced in the Budget — for, if skilled labour is available, wage pressures will ease, employment will grow, and execution of projects would be speeded up.
These are suggestions that every government, notwithstanding its colour, needs to act on, and, therefore, are independent of electoral arithmetic.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at firstname.lastname@example.org