Of all the issues fuelling the current spat between the government and the Reserve Bank of India (RBI), the most immediate and serious is the liquidity crunch faced by non-banking financial companies (NBFCs) as a fallout of the serial defaults by the Infrastructure Leasing and Finance Co (IL&FS). I have written before on the shared culpability for that crisis . The much vaunted fiscal laws of the country lack the kind of reporting requirements that would have laid bare the close links of IL&FS to the fisc. And of course, the regulator should have seen it coming as well.

That said, blame time is over, and the time for action is now. Initially, I thought RBI acted with alacrity in freeing bank funds for lending to NBFCs. But banks have responded by not lending to NBFCs themselves but to those of their underlying borrowers who had adequate credit quality. From the perspective of banks, who are in terrible shape themselves, they are hardly to be blamed. Under the circumstances, the government suggestion for a special liquidity window was entirely in order. After all, were we not all taught in one of those early classes on banking, that the central banker is the lender of the last resort?

The duel between the Union finance ministry and RBI has made us forget that there was yet another recent scam involving data theft in Paytm by a trusted insider, which was averted in the nick of time. Paytm had morphed fully into a payments bank and was therefore subject to the regulatory protocol of RBI governing all deposit-taking financial institutions. There appears to have been no regulatory failure prima facie, since executive access to data is considered an internal matter outside the purview of the regulator. This probably needs to change. The internal access protocols governing access to data at all levels in these institutions should become a regulatory concern, since unfettered access and sharing of such access, even at the highest levels, leaves room for fraud, as we have just seen.

Paytm started out as a payments provider, at a time when digitization was being pushed in the country at a frantic pace. It was inevitable that sparks like Paytm would, by their very pace of growth, attract official approval and sanction. Paytm attracted deep pocket global investors like Berkshire Hathaway (powered by Warren Buffet, the “sage of Omaha"), Ali Baba (powered by Jack Ma), and Japan’s SoftBank. Investors don’t like unpleasant surprises, especially those caused by process failure. There are contagion fallouts when such powerful fingers are (nearly) burnt. India’s capacity for risk management will be judged to be not in sync with its digital ambitions.

Start-ups of their very nature are driven by entrepreneurial individuals with vision and drive. In this Schumpeterian world, there is no internal motivation to build up checks and balances within the growing organization. The promoter cannot stop to do that. It is seize, grab and grow. It was a further inevitability that the start-ups would attract employees who are themselves entrepreneurial, and in a financial replay of the Basmasura story, turn on the person who empowered them. Clearly there is an imperative need for the risk management architecture of all digital payments providers to be under close public regulation and supervision.

A central bank, in ensuring financial stability, has to perform adequately on multiple dimensions, and has to be flexible on which of those assumes primacy at any time. Pardon the parallel, but it is rather similar to the role of a housewife who has to do the cooking, cleaning and child-raising, and flexibly assign priority to these several functions in the course of a single day. It is impossible, and fruitless, to decide that a bureaucrat can perform better than an economist in the role of heading a central bank. Group characterizations can be harmful, when it is the individual that matters.

That said, what economists tend to do, I regret to say, is to preach the virtues of an optimal destination without stopping to think about the optimal pace of the journey to that destination, and the regulatory requirements needed. Those details are waved away as too mundane to engage their minds. To the best of my knowledge, the high priests of cashlessness, Willem Buiter and Kenneth Rogoff, have not written on pace and sequencing on the journey to a digital nirvana.

The hope is that the Paytm scam, and the several bank and non-bank scams that preceded it, will not have too great an impact on the key metrics of the economy. The Centre has moved quickly to replace the board of IL&FS, and has successfully gained time from the National Company Law Tribunal (on appeal) for gathering together funding from asset monetization, hopefully without reaching further into the pockets of the Life Insurance Corp. of India, with which to pay off the accumulated debt.

As for the headline fiscal deficit control targets, although the Union finance minister has given an assurance that the budgeted deficit at 3.3% of gross domestic product (GDP) in the current year will not be crossed, that looks like a difficult promise to keep. The website of the Controller General of Accounts (CGA) shows that in the first six months of the current fiscal year FY19, the fiscal deficit was at 95% of the budget estimate for the year. At the same point last year, it had reached 91% of the budget estimate, and the year correspondingly closed with an actual deficit 10% higher than budgeted in absolutes (3.5% of the GDP as against 3.2% budgeted). [That was by the revised estimates. The absolute actual for FY18 just issued by the CGA is configured differently from the corresponding budgetary figure, but is a touch higher than their revised estimate, so the actual for FY18 by the budgetary calculation should if anything be higher than 3.5%].

The grave danger is that the attempt to reach the budgeted figure will lead to cuts in support to science and technology or other such groups without political clout, as is already happening. Brittle funding will be more effective than any other barriers to science research, an objective to which the government has committed itself.

Or there might be other desperate reaches with similarly adverse consequences. I wholly endorse the stand of deputy governor Viral Acharya on the folly of handing over the contingency reserves of RBI to plug a fiscal deficit. At the same time, there is a strong case for making over the entire profit as dividend to government, without adding further to the reserves of RBI.

Overall expenditure in the first six months of the current fiscal year, at 53.4% of the budgeted allocation, is about where it should be. The problem is the lag in revenue. Income tax (corporate plus personal) and GST stand at 38% of what was budgeted. Non-tax revenue, and customs and excise have done better, both at 45% (the oil price rise and falling rupee helped). Indirect taxes should hopefully be peaking around now with the festive season, and direct taxes should also show an end-of-year peak. So all is not lost, but then again, transparency and honesty will win the war more than obfuscation.

We need the executive to do its job with fiscal control, we need the regulator to be vigilant, and we also need the judiciary to intervene wisely, if this diverse country is not to whip up the waters in which it sails. The judicial intervention to open up the Sabarimala temple to women of all ages had the unfortunate outcome of precipitating rather than preventing turbulence. The dissenting opinion by the lone woman judge on the Supreme Court bench was the one that had it right.

This was very different from the opening of temples to all castes nearly a century ago in princely Travancore. There was no equivalent generalized ban on temple entry of women of reproductive age. There is a standard convention against entry during menstruation, but because this is a case of what economists call asymmetric information, where only the woman knows the truth, temples over the years simply relegated the issue to self-regulation.

The Sabarimala temple was the exception which did not go with self-regulation, and banned women in the age group 10 to 50 altogether. I know no devotees of the temple myself, but my sense is that women see the wait as an offering towards the reward of survival up to the qualifying age. The disruption following the judgement was the last thing Kerala needed in the wake of the terrible flood damage suffered in the monsoon.

Where is the link between these episodes and the economy? In a globalized world, they matter a lot. When a country is seen as susceptible to greater frequency of disruptions because of unresolved religious, ethnic, political or environmental issues, global supply chains tend to look elsewhere. And that is exactly what has happened. India is being given the go-by.

It is futile to look at rupee depreciation to give buoyancy to exports. In a research study I did at the time of the 1991 reforms, I found that exports were sensitive to the external value of the rupee only in the case of bulk exports, like generic drugs or leather. Today, we could add software exports. But for value-added products linked to a global supply chain (like shaped footwear parts instead of leather), price sensitivity was either lower or altogether absent. Links in a global supply chain are based on trust in fidelity to specifications and timely delivery.

The rise in India’s ranking in the World Bank’s Ease of Doing Business is commendable. But let us not forget that exports, like all other economic activity, face multiple obstructions on a day-to-day basis, and that the World Bank ranking is based on conditions in just two cities, Delhi and Mumbai.

Indira Rajaraman is an economist.

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