Opinion | The perils of policy decisions based on shaky assumptions | Mint
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Business News/ Opinion / Columns/  Opinion | The perils of policy decisions based on shaky assumptions

Opinion | The perils of policy decisions based on shaky assumptions

A respect for facts would show that it is the country’s rural economy that needs to be revived first

Agricultural inflation was negative six months before February 2019, unlike now (with prices at least rising again). (Photo: Mint)Premium
Agricultural inflation was negative six months before February 2019, unlike now (with prices at least rising again). (Photo: Mint)

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on 4 October once again reduced its policy rate. Given the state of the economy, reducing the repo rate seems like the only option left for policymakers, though despite a repo reduction of 135 basis points in 2019 alone, there is no evidence of either higher investment or higher credit offtake in the economy. In fact, there has been a sharp drop of 88% in the flow of funds from banks and non-banks to the commercial sector so far this fiscal year. This raises further questions about the use of monetary policy to deal with what is essentially a demand-side problem. However, what did come as a surprise was the late realization by RBI that growth in 2019-20 may be only 6.1%, compared to 7.2% expected at the beginning of this year. Clearly, the old assessment was just wishful thinking in an election year. It also raises a question mark on the ability of the MPC to assess the health of the economy. In fact, the February MPC report is in complete contrast to the October one on the assessment of the economy. So did everything change in just eight months? Unlikely, given that most indicators that RBI has relied on to draw its conclusion that the economy was demand-constrained were also available in February. Wages were stagnating even then, and agricultural incomes were declining with the terms of trade moving against agriculture even then. Agricultural inflation was negative six months before February 2019, unlike now (with prices at least rising again). Commercial and passenger vehicle sales were declining even then, with growth in credit offtake decelerating across all categories.

However, it is not just RBI that forgot to take into account the facts that were readily available and compiled by its own research team. The Union finance ministry has done no better, with two budgets and economic surveys this year alone. Forget about discrepancies in the data reported by the same office in the economic survey and the budget documents, even the assessment of the economy appears to have been written without looking at the facts that have been reported by Indian newspapers.

But then, this government does not seem to lay much store by data, though this does not appear to hurt popular perceptions of its ability to produce miracles. The attempt at suppressing and discrediting employment surveys was not a one-off incident. A similar fate could befall consumption expenditure surveys, which are likely to show a much worse situation than what the government might like us to believe. The second stage would be to discredit the data as and when it is released. The quarterly Periodic Labour Force Survey reports, which were to be released every quarter, are nowhere in sight. These would have been trivial issues so long as they did not guide policy aimed at getting the economy out of the mess it is in. It is here that any step not based on facts but on shaky assumptions is likely to cause more damage than can easily be anticipated.

There is a general consensus on the necessity of reviving rural demand as the first step towards reviving the Indian economy. However, there has not been a single move that could inspire confidence that the government is aware of the ground situation. Right from the policy rate reductions to a corporate tax bonanza, almost all solutions offered are responses to a supply-side problem. The resistance to facing facts also means that the government is creating further problems in the rural economy. Take the massive food stocks with Food Corporation of India (FCI). Funded with off-budget loans, these have led to a situation where FCI is sitting on large stockpile of food grains. A natural consequence is that the government is unlikely to raise procurement, which is essential for agricultural incomes to rise. So is the case of a delay in wage payments under the rural employment guarantee programme when the need of the hour is to expedite payments and raise rural wages. The story of income transfer schemes and other programmes is no different.

One can conclude that the policies of this government show little respect for facts from its own sources. As against a need for a strong rural stimulus, there have been all kinds of efforts at offering relief to the corporate and financial sectors of the urban economy. While none of this has contributed to raising demand or investment through credit expansion, it did deprive the government of its already stressed fiscal space to use public expenditure for a revival of the rural economy.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

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Published: 10 Oct 2019, 10:32 PM IST
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