I can well imagine how excitement and expectations today would overshadow concerns about economic issues, but the real world of goods and services, of markets and trade, will go on independent of the blips of politics. The last couple of weeks have been particularly interesting, and a lesson on how differently similar problems are being handled in the US, UK and here.
The concerns over the likely implosion of the two massive mortgage security institutions in the US—Fannie Mae and Freddie Mac—are an example. These are government-supported institutions (GSEs), which buy mortgages from banks using debt raised in the market at lower interest rates. Once the underlying mortgages get distressed, so does the business model. These two institutions account for a significant proportion of the mortgage debt outstanding in the US, and a collapse would ripple through the entire financial market. In the wake of the likely implosion of a California-based bank, the Fed and the treasury have moved swiftly to find a solution. Fannie Mae and Freddie Mac will have access to federal funds in the form of debt, equity and guarantees, but existing shareholders would have to take the brunt of lower values. There have been academic debates on two counts—first, concern over state intervention in a country where markets are traditionally left to determine winners and losers; and second, the moral hazard of choosing new equity over the older shareholders, arguing that this would reduce future risk taking by investors. But markets and the public have broadly welcomed the moves.
Note that in an unusual situation, the treasury and the Fed have not been averse to finding new solutions, in fact pragmatic ones over theoretical, and the treasury secretary is winning applause as a problem solver. At the same time, the Fed chairman is open about his concerns and has presented a grim picture of inflation and economic slowdown.
So, pragmatism and transparency, and an attempt to ensure swift action to protect the masses of investors and customers. In short, less economists, more doers.
Similarly, in the UK, there is transparency over the Bank of England’s letters to the chancellor saying that they would have to live with the inflationary pressures, as any monetary tightening would slow growth further. There is also the promise that banks and institutions in distress would be supported.
Let’s compare this with events here. First, there is an assertion in the media, and in public, by policymakers, ministers, etc., that there is nothing to worry about. It has been said that inflation will decline by itself; the economy would continue to grow; food prices would be higher; and people would have difficulties making ends meet, but everything is fine. And in any case, the problems are due to causes beyond our control and, hence, there is nothing much to do. One has only to watch the TV to see this message repeatedly coming across from the government.
It is possible to argue that in the face of declining growth in industrial production, lower capex investments, and slowing infrastructure development, pragmatic answers are possible. For example, and there could be other ideas as well, focused support to investment and industry as well as emphasis on rapid infrastructure development could ensure that we do not get into a downturn. It is better to react early than too late. Further, if it is clear that higher oil prices are here to stay, is it not important to know the strategies for dealing with the future? In terms of problem solving, the Reserve Bank of India (RBI) has also been a hesitant conservative. Depreciation of the rupee has certainly added to inflationary pressures, but RBI has not sought to deploy its reserves to stem this, and reduce the burden of the market stabilization scheme bonds.
The other, more significant departure is the concern over individuals, over shareholders, rather than public at large. The windfall tax controversy is a case in point. Windfall gains are associated with lotteries, where a risky investment is made with a low chance of success. How would unexpected increases in oil prices constitute windfall gains? If there have been aberrations in policy, these need to be addressed, and a wakeful media needs to question how these aberrations happened, but to raise this to the level of a national debate is surely a waste of resources in itself.
This brings me to the final thought. Everywhere I have gone, I can actually see the benefits of government activity for citizens. In Cambodia, I recently saw a large public lake being upgraded into a leisure spot, where the buzz among citizens was about the benefit from tourist inflows. Why are there very few public projects in India that people relate to, where they can see direct benefits? The Delhi Metro, of course, is an exception. If public policy is for the few and by the few, it would only alienate the citizenry, sooner rather than later.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at email@example.com