Opinion | Credible policy options for the revival of economic growth

On Monday, I saw the news in this newspaper that June’s rainfall shortage is significant. It is only marginally better than it was in 2014. It is an unfortunate coincidence that both the National Democratic Alliance’s second and third governments started with a deficient first month of the monsoon. The article wondered if the shortfall warrants fiscal and monetary stimulus.

In theory, a demand stimulus amid a production shortfall would only be inflationary. However, there is excess capacity and demand can be stimulated. Will lower growth in rural incomes arising from monsoon travails be helped by lower interest rates? India’s household savings rate has declined and it has not bottomed out. Are savings rates dependent on interest rates or incomes? The right answer is that it depends on both. In theory, people save when interest rates are higher. The opportunity cost of spending rises with higher rates. However, savings are generated when people have incomes. That is paramount.

The Reserve Bank of India (RBI) did the right thing by signalling a shift to an easing bias in its monetary policy stance as both economic growth and inflation have undershot expectations. Not only was first quarter (January–March 2019) economic growth below 6%, the second quarter growth rate too isn’t expected to show many signs of revival. The Purchasing Managers’ Indices for both the manufacturing and service sectors have shown softness.

In these times, calls for stimulus are growing louder. The room for a fiscal stimulus is limited. The general government deficit (Union and state governments and public sector enterprises) is close to 9% of gross domestic product. However, difficult times call for flexibility and not dogma. The international environment is also turning conducive for developing economies, in the sense that feckless central banks in the developed world, while proclaiming independence from their democratically elected governments, are prepared to ease monetary policy in a consistent and constant display of meek submission to the whims of capital markets. Their waning credibility is reflected in the resurgence of the prices of Bitcoin and the yellow metal. Therefore, for now, the international policy cycle allows governments in developing countries to take policy measures without worrying about whether their cost of borrowing would rise, their currencies would weaken and their stock markets would slide. Governments should be opportunistic about their short-term growth strategies. It requires specific measures and specific mindsets.

They can relax their fiscal deficit constraint, provided such relaxation is deemed credible. For example, a higher fiscal deficit on account of enhanced allotments for asset creation would be credible, provided mechanisms to monitor such asset creation expenditure are also created. Further, the government should agree to a similar arrangement with RBI as it seeks a portion of the central bank’s excess capital to be transferred to its coffers. That is, the government should agree to earmark the excess capital returned by RBI for replenishing bank capital.

Before doing so, the government should set performance criteria for banks to be eligible for additional capital. This was one of the recommendations of the 14th finance commission. In general, this would also send a message of accountability in return for resources. A similar approach should be adopted for Mudra loans. The government should work with RBI to evolve criteria for micro and small enterprises to be eligible for loans. That is, further financial support should be contingent on enterprise growth and employment generation. The government should always give equal importance to efficiency and equity considerations in its policies. This alone would not guarantee that micro enterprises turn small and small ones turn into medium-sized enterprises. These enterprises become ineligible to receive government support and concessional loans once they grow bigger. So, many of them operate below the thresholds.

Over the weekend, I learnt first hand of the travails of an informal social enterprise in Thiruvannamalai in Tamil Nadu as it sought to formalize itself. The time, effort, frustration and cost of this endeavour explain why India has a vast informal sector and why efforts to formalize it through strong-arm methods fail. There is a need for root and branch evaluation of the policies, rules and regulations governing small enterprises in India. The government’s “talk and take” tack works at cross- purposes. This case study, once completed, should be an eye-opener for state governments.

That brings us to the central bank. This newspaper gave an interesting headline to its report on RBI revising its famous circular of February 2018 after the Supreme Court struck it down. It called the new RBI guidelines “an exercise in humility” (RBI’s 12 February Circular Makes A Comeback With A Dash Of Humility, 10 June 2019). I think that is a continuous requirement on the part of occupants of South Block and the tall white building on Shahid Bhagat Singh Road. We will have more to say on its precise meaning in the coming weeks.

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business (KREA University). These are his personal views.