Special focus on agriculture missing link in both policies

On Friday morning, when the Reserve Bank of India (RBI) governor Shaktikanta Das dealt his sharpest and deepest cut to interest rates, the markets remained rather lukewarm, if not outright cold, to the central bank’s response to the coronavirus crisis. Coincidentally, the market also slipped on Thursday after finance minister Nirmala Sitharaman announced the government’s relief package. Happenstance or coordinated policy action, Das shares something else in common with his boss, Ms Sitharaman: both the policy designs seem to have not only missed a beat but also failed to address the right constituencies.

RBI’s deep rate cut, perhaps unprecedented in its scope, also needs to be viewed in the backdrop of Thursday’s fiscal package.

Both the fiscal and monetary packages, set next to each other, do make for a pretty picture but that’s just about it. The monetary package does try hard to make up for the deficiencies in Sitharaman’s package, as has been the case for the past few years. And yet, RBI is unable to go the whole distance because it can’t rush into areas reserved for fiscal action.

The government’s ₹1.7 trillion fiscal package has left people unsure of its impact, or its efficacy in delivering the benefits to the ultimate beneficiaries. Take the case of grains and pulses to be delivered to 800 million individuals: there is no clarity how the distribution will work, especially because the severely disrupted supply chains will take some time to get back on the rails.

There is another oddity about both the fiscal and monetary policies. At a time when the lockdown has affected both manufacturing and services, agriculture could perhaps become the only growth engine for the economy. Yet, both the packages seem to be missing a sorely needed special agriculture focus. The rabi crop – especially, mustard, wheat, barley, gram, linseed—usually reaches markets around this time of the year. The government’s focus should have been two-pronged: ensuring a higher volume of crop purchases through higher procurement prices (as an alternative resource transfer mechanism), and, to press into action an intensified and repurposed distribution mechanism to ensure delivery of foodgrains across the country. Both government and RBI should have coordinated action on this front.

Barring regulatory forbearance on crop loan repayments or agricultural term loans announced by Das today, there should have been additional credit lines opened for the agriculture sector. Everybody keeps saying that this is a war-like situation, but somehow the response – barring the lockdown —doesn’t quite feel appropriate.

On a different note, two interesting factors set apart RBI’s Friday action. One, driven by the urgency of the situation, RBI had to bring forward the scheduled meeting of the Monetary Policy Committee (MPC) by a week. Two, for the first time, the central bank has shied away from providing any guidance on either economic growth or inflation. Both factors are unprecedented and symbolize in some ways the extraordinary situation in the world. “Given this heightened volatility, unprecedented uncertainty and extremely fluid state of affairs, projections of growth and inflation would be heavily contingent on the intensity, spread and duration of Covid-19. Precisely for these reasons, the MPC refrained from giving out specific growth and inflation numbers,” governor Das said.

The urgency for a central bank action was heightened after the country went into a forced 21-day lockdown, which dampened overall demand and further jeopardised growth recovery chances.

Das has pressed all the buttons that any central bank would in these times: reduced interest rates drastically, opened all the liquidity taps at full tilt to ensure credit flows (including re-directing part of the fresh liquidity flows to forestall defaults in the corporate bond markets), provided regulatory forbearance for asset recognition and capital adequacy norms. This is copybook central bank action in an economic crisis, whether it’s a financial meltdown or an unmatched pandemic.

But central bank policy action has inherent limitations. It cannot single-handedly revive an economy; the fiscal side has to play a much larger role. It would seem that the government is still obsessed with maintaining fiscal prudence at a time when the rest of the world has already eschewed fiscal fundamentalism. This is where the monetary and fiscal wheels start to look misaligned.