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RBI’s reassurances are not enough to address macroeconomic stress

The rising cost of servicing this record level of debt, with the RBI hiking interest rates, and the government giving no clue on what new sources of revenue it plans to tap, will bring India's current sovereign rating profile under stress (Photo: Mint)Premium
The rising cost of servicing this record level of debt, with the RBI hiking interest rates, and the government giving no clue on what new sources of revenue it plans to tap, will bring India's current sovereign rating profile under stress (Photo: Mint)

The RBI, finance ministry have not offered any roadmap for how India's macroeconomy managers plan to address the darkening clouds over the economy and how the red-hot macroeconomic parameters will be repaired. This is essential for restoring confidence, given the global economy is going to be in turmoil, possibly a recession, for at least the next one year, if not two

Reserve Bank of India Governor Shaktikanta Das has in a news interview tried to project confidence that the central bank is in control of the macroeconomic situation.

But the data tells a different, worrying story. Many of the red-hot macroeconomic parameters are, in fact, already, weaker than the levels seen in 2013, when India was in the ignoble 'fragile five' phase during the UPA government's tenure. Rising macroeconomic stress back then had led to a run on the rupee, but today the rupee is weaker than then.

The rupee has been dipping deeper to new lifetime lows every few days, even as the central bank is drawing down on its foreign exchange reserves to defend the rupee by selling dollars, a strategy that may soon prove futile and unsustainable. The rupee hit a record low level of 77.76 to a dollar last week, even as the RBI's foreign exchange reserves are down from the record $642 billion to $593 billion in a matter of months. The reserves are bigger now but that's cold comfort, as the global economy's troubles have only just started. The turmoil could last months.

The current account deficit isn't as bad as it was in 2013 but had grown to 2.7% of GDP, as of 31 December 2021, the highest in 9 years. Anything above 2% of GDP is considered unsustainable for India.

Inflation was just under 8% in April, the highest since May 2014, and nearly twice the target of 4% that the government has set for the RBI. Average inflation is projected at 6.9% for this fiscal year, which is the highest in 9 years.

The biggest cause of stress is the fiscal deficit position, which is weaker than in 2013 when it was 4.5% (although the UPA government did not include in the reported figure the under-the-line deficit, which, this government, to its credit, has). The fiscal deficit could be close to 7% by 31 March 2023, or even higher, depending on how much lower disinvestment proceeds will be than the budget's estimates. Already, the dividends from the RBI are a lot less than what the government had budgeted. Plus, the government is forgoing revenues by reducing taxes to cushion the blow of rising prices on the cost of living and business. More rounds of tax cuts can increase the deficit further. Bringing the fiscal deficit under control may take years. Government borrowing, already high, is set to rise to record levels. There's no way India will be able to reduce the public debt to 60% of GDP, the FRBM target, in the next few years.

The rising cost of servicing this record level of debt, with the RBI hiking interest rates, and the government giving no clue on what new sources of revenue it plans to tap, will bring India's current sovereign rating profile under stress.

In these circumstances, the reassurances Das is trying to provide fall woefully short of what is needed. Central bankers' reassurances are welcome in times of heightened global economic anxieties and increasing economic hardships for businesses and people that the British are calling 'the cost-of-living crisis'.

However, Das is trying to soothe rising uncertainty by pointing to other economies, and deflecting blame for the darkening clouds over the economy to disruptions caused by Russia's invasion of Ukraine.

He sought to explain away India's stubbornly high inflation as an outcome of the war, when official data shows that inflation was high and close to the upper tolerance limit of 6% by 2019, before the pandemic outbreak. Average inflation in FY21 was 6.2% and wasn't all that comfortable in FY22. All along, the RBI remained dismissive of experts cautioning that inflation was set to become stubborn, and Governor Das kept insisting that inflation was "transitory" as if it would simply ease on its own.

By his own admission, none of the macroeconomic parameters will improve over the next few months. This has implications for the quality and pace of GDP growth. Beyond blaming global factors, the RBI and the finance ministry have not offered any roadmap for how India's macroeconomy managers plan to address the darkening clouds over the economy and how the red-hot macroeconomic parameters will be repaired. This is essential for restoring confidence, given the global economy is going to be in turmoil, possibly a recession, for at least the next one year, if not two, as advanced economies fight off inflation by cooling down their economies with tightening policies.

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