Opinion | RBI plays revive note, will FinMin do an encore?

Last week, the Reserve Bank of India (RBI) changed gears. The central bank hit the pause bottom on rate cuts, but left no one in doubt that it is going to focus on reviving the economy from now on. At the same time, RBI maintained that it was aware of the build up of stress in the financial sector and assured everyone that it was on top of things (fingers crossed, given that every sign points to a crisis in the making).

I first heard of the three step approach—survive, revive, and thrive—to fix the post-covid Indian economy from the very insightful analyst observations penned by Saugata Bhattacharya, chief economist, Axis Bank. Very similar to the Olympic motto: Citius, Altius, Fortius meaning faster, higher, stronger—three words to inspire the athletes to deliver their best in competition. This fits the current circumstances rather well.

From RBI’s actions on Thursday, it is apparent that we are indeed transitioning to the second phase. All is well, but it is only that there is some uncertainty about the timing and substance of the next steps. RBI alone cannot do the heavy lifting. It has to be in tandem with the Union government.

This is because the challenge is daunting. Essentially, the economy runs on twin engines: consumption and investment. The latter took a massive knock after the global crisis of 2008 and has in the last few years all but ceased to perform. The consumer economy started to take a hit after prolonged agricultural distress (ignored by policymakers till recently) began to take a toll. The covid-19 pandemic and the subsequent lockdown was the final blow. In short, the twin engines of the economy are not functioning. The only solution is for a kick start (read stimulus).

All eyes are then on North Block. Its incumbent, Nirmala Sitharaman, in an earlier interview with Mint, immediately after the ₹20 trillion stimulus package was announced, had signalled that a stimulus was very much on the table. The question was priorities and timing. The initial strategy, and rightly so, was to protect lives. As the initial shock of the covid-19 pandemic has waned, the focus is gradually shifting to protecting livelihoods, which is particularly relevant for India where millions of lives depend on what people earn from their daily livelihood.

The time for tough decisions is here. RBI has already shown its hand and very uncharacteristically owned up to how it has successfully lowered borrowing costs for businesses. Similarly, politically incorrect, yet economically pragmatic need to be taken by the Union government. It has the social capital, especially with Prime Minister Narendra Modi’s popularity ratings, as reported in India Today last week, at record highs, to absorb the political criticism that will accrue from the Opposition (it is the dharma of the Opposition to oppose).

What the Modi government has going in its favour is what the late Arun Jaitley put as the ability of the National Democratic Alliance to be simultaneously “pro-poor and pro-business”. It has, therefore, not shied away from backing business or providing a helpful nudge to potential foreign investors.

At crunch time, it is clear that the industries hurting most are those who are part of the contact economy. The enforcement of social distancing and subsequent lockdowns have devastated hospitality and aviation in particular. Without help, they risk going under. Not only will it worsen the economic situation and create bad press, but also debts owed by them can push the financial sector to the edge.

The problem is how the Union government does help. Not only does it have to be calibrated but it also has to be selective, given the paucity of resources. Almost every rupee to be borrowed by the government will have to be accounted for, not so much to manage the politics, but to ensure the economy recovers in earnest. The spate of recent foreign investments in the digital economy suggests that the tide may be turning. Over to North Block then.

Anil Padmanabhan is managing editor of Mint and writes every week on the intersection of politics and economics.

Comments are welcome at anil.p@livemint.com