Across the aisle: Bad ideas will drive out the good

The MPC’s statement, with unanimous support, is significant not only for the cut in the policy repo rate but also for the analysis of the economic situation.

Written by P Chidambaram | Updated: October 9, 2016 5:27 am
RBI, RBI rate cut, RBI repo rate, rbi policy review, rbi policy, urjit patel, rbi repo rate, rbi rate cut, indian express Reserve Bank of India

We have a new Governor of the Reserve Bank of India, we have a Monetary Policy Committee (MPC), and we have their first statement on monetary policy. It is tempting to read the tea leaves!

The MPC’s statement, with unanimous support, is significant not only for the cut in the policy repo rate but also for the analysis of the economic situation. The statement has come at the end of the first half of the fiscal year and, therefore, it is helpful to understand the state of the economy at the mid-point of the fiscal year which is also the mid-point of the term of the Central government.

On the global economy, the outlook is gloomy. Growth has slowed more than anticipated, trade has contracted more sharply, there is rising protectionism, and “an uneasy calm prevails on uncertainty about the stance of monetary policy of systemic central banks”.

State of the economy

On the domestic economy,
* “the outlook for agricultural activity has brightened;
* “the industrial sector has suffered a manufacturing-driven contraction;
* “inflation excluding food and fuel has been sticky around 5 per cent, mainly in respect to education, medical and personal care services;
* “in the manufacturing sector, the persistence of considerable slack…;
* “in the external sector, merchandise exports contracted in the first two months of Q2;
* “subdued domestic demand was reflected in a faster contraction in imports;
* “the decline in remittances and the flattening of software earnings warrants monitoring;
* “while the pace of foreign direct investment slowed compared to a year ago, portfolio flows were stronger.”

These conclusions were visible in the numbers that we had read in the last 12 months or more. Let me give only a few figures and say it in a way that is easy to understand:

* In Q1 of 2016-17, Gross Fixed Capital Formation (that is additional capital investment) declined by 3.1 per cent compared to same period of the previous year.

* In Q1 of 2016-17, net sales of all firms declined by 1.9 per cent and of manufacturing firms by 4.8 per cent over Q1 of 2015-16.

* During February-July 2016, credit to all sectors increased by a modest 9.5 per cent, but credit to ‘industry’ grew by only 1.72 per cent over same period last year. Credit to micro and small industries declined by 3.46 per cent and credit to medium industries declined by 10.62 per cent.

* The Index of Industrial Production for all industries during February-July 2016 increased by a mere 0.25 per cent, while for manufacturing it declined by 1.01 per cent over same period last year.

* Non-Performing Assets of banks stood at 7.6 per cent as against 4.6 per cent at the end of the previous year.

The ground reality

Now you know why there is no visible job-creation, why there is anxiety among parents, and why there is anger among the youth. Now you know why the job-creators (exporters and micro, small and medium industries) have thrown up their hands in despair. Now you know why the large business houses are investing abroad rather than in India.

It is not as if the government is doing nothing right. The government was on the right track when it affirmed its commitment to fiscal consolidation. It is doing the right thing in selling its stake in chronically loss-making public sector enterprises. It is pursuing the right strategy in pushing more investment into infrastructure, especially roads and railways. However, these measures will not be enough unless the private sector — big, medium and small — re-discovers its appetite for investment. That, unfortunately, is not happening.

Poor aggregate demand is the main reason for low investment. That ‘doing business in India’ has not become easier (despite the hype about climbing a few notches in the ranking ladder) is another crucial reason. Regulators have once again turned into controllers and have churned out reams of rules and regulations that are frightening. Investigating agencies, including the investigation wings of tax departments, have unleashed a wave of threats and terror. Litigation in commercial matters, often involving the government, has reached alarming proportions with no effective alternative dispute resolution mechanism. State governments seem to have lost interest in ‘reforms’ and seem happier pursuing ‘welfarism’.

Government losing its nerve

This is the time when the government should not lose its nerve or its focus. Unfortunately, there are signs that the government is looking for a short-term boost — increase spending to boost growth in the short-term and lure the people to be mesmerised by the dazzle of the number 7.6 (of GDP growth).

What else can one make of the government’s mandate to a committee to explore the feasibility of “flexible” fiscal deficit-targeting? And what else can one make of the first sign of “flexible” inflation-targeting that has emerged out of the statement of the MPC? Why did Governor Urjit Patel push back the deadline for achieving the inflation target from March 2018 to an unspecified “medium term”?

Both are very bad ideas. I hope the N K Singh committee will junk the idea of a flexible fiscal deficit target and recommend that the government should under no circumstances — except in a case of a declared war — breach the limit of 3 per cent for the fiscal deficit. I also hope that in the next policy statement Governor Patel will restore the RBI’s stance on inflation and re-affirm that the deadline for achieving the inflation target will remain at March 2018.

Website: @Pchidambaram_IN

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  1. H
    Hemant Kumar
    Oct 9, 2016 at 1:45 am
    Railway budget has been done away with, release date of annual general budget has been advanced by one month, MPC has been consuted, bankruptcy code has been made, voluntary black money declaration has been more effective than Chidambaram's, foreign route of money trail for tax Haven/ evasion have been busted, Bank board for NPA resolution under Vinod Rai has been consuted, other measures cannot be mentioned here as space will fall short.. This is the tailor, actual movie is yet to come. Chidambaram during his tenure, was only thinking of making the movie of his son.
    1. K
      Oct 9, 2016 at 9:36 am
      Yes, that is why corrupt editors and corrupt columnists must stop polluting the media with their bad ideas.
      1. M
        Oct 9, 2016 at 1:13 am
        Most realistic picture provided by the leader who has led this country during its top economic performance. These great insights paint the truest picture for the benefit of all. You can ignore it only to your own peril. The present government lacking talents, is running like headless chickens but clucking nevertheless, is also clueless on economic management. Failure and non-performance on all fronts. The down slide has started for them except for the blind mobs of upper caste upper strata wallahas. Please learn from the greatest minds of the nation. Unfortunately you do not have the neuronal circuits to do that.
        1. O
          Oct 9, 2016 at 2:30 am
          Chidambaram, writes the article and ask his chamchas to write reviews as"eye opener" ,"great person" etc. Otherwise India is fed up with this who engulfed many people 's food and now doing lecture bazi
          1. T
            Oct 9, 2016 at 12:59 am
            A rigorous economic discipline will only ensure a safe future for the nation. Euphoria, hypes, rhetoric will help no government in the long run besides giving them an ineffective anesthesia for a time being. If fiscal inflation targets are breached, that will only help congress to come back to power since in the present situation of job less non-growth an succinctly explained that will be last thing people will be able to tolerate. The hall mark of the Tallest leader is economic prudence. You are the greatest epitome of this. The nation needs you back at the top to take it forward. Thanks sir for an excellent article.
            1. T
              Oct 9, 2016 at 1:22 am
              Indeed an realistic eye opener of an article which will only greatly help the government and the people. By not following this wise advise, the government is once again going to shoot itself on its foot again. Sir so please continue to share the great ideas wihich are too good for this government. They will continue to ignore it and shoot themselves on their foot. That is a very positive election strategy for 2019. Thanks sir
              1. O
                Oct 9, 2016 at 8:44 am
                Unbelievable that the 6 member MPC had a unanimous decision to cut interest rates, reduce the real return for savers, and ignore the high inflation rate for the ordinary citizen, whose food, and daily services are inflating way beyond 10%. RBI in one stroke his lost its credibility of being independent.
                1. A
                  Oct 9, 2016 at 3:11 am
                  s chup!!!!
                  1. S
                    Oct 9, 2016 at 3:12 am
                    Absolutely right
                    1. C
                      C M
                      Oct 9, 2016 at 2:34 pm
                      Thank God N Shivakumar has the good sense to admit what is right.The rest have only spewed venom,as usual, because they do not have any intelligent response to an excellent,no nonsense article by P C
                      1. D
                        D.P. Mistry.
                        Oct 9, 2016 at 12:00 pm
                        Chidumberum is an intelligent lawyer who misguides inocent people as most lawyers usually try. Dear fellow your lies will not carry anything with the intelligent Indian public. So please stop preaching what you did not do during your time in power.
                        1. G
                          Oct 9, 2016 at 9:21 am
                          Just remember one thing before you write anything, the mess of 65 years that your party left behind will take at least 10 years to rectifydia is on right track.
                          1. C
                            Oct 9, 2016 at 1:16 am
                            One sided rants and ravings of a desperate pervert who doesnt understand that hislt;br/gt;lt;br/gt;credibility has deserted him a long time ago (except) of course in the master acts oflt;br/gt;lt;br/gt;dacoity and loot of the exchequer
                            1. K
                              k p
                              Oct 9, 2016 at 2:56 am
                              The likes of HK and the other bhakts comprised in the 35% of the voters, whose blessings have given birth to the current Raj-Pat, have the luxury of drawing solace, till 2019, in counting on the false/misplaced/cosmetic/peripheral/propaist changes in past practices(not reforms by any standard). THE INFLATED GDP NUMBERS ARE CONTRADICTED STARKLY BY THE NUMBERS OF SECTORAL PERFORMANCES AND THE NO-GROWTH-NUMBERS OF DEMAND and EMPLOYMENT GENERATION. The unemplo youth is looking for jobs and not these make-believe-numbers. Destruction was well accomplished by the likes of Vinod Rai but, he is now found utterly wanting in his present task of creation - Banks' NPA-resolution endeavors, if any, have produced negative results(jump from 4.6% to 7.6%). The present dispensation is clever but insincere. Great work demands sincerity not cleverness.We have been having plentiful supply of event-management only; economy-management has been lacking starkly. And the tail-spin has, very sadly, caught-up, with this Raj-Pat.
                              1. K
                                Oct 9, 2016 at 2:45 am
                                Who decides what bad and good is, a pompous, self-appointed pi*p like you?!
                                1. A
                                  Oct 9, 2016 at 9:01 am
                                  No one should believe the fairy tale of the MPC being either objective or autonomous. They will do what they are told, their contribution limited to putting it into impressive sounding jargon. All economics is politics, like the farm loan waiver that UPA believes won it a second term, and what Rahul hi is offering the voters of UP.
                                  1. V
                                    Vish Ontoor
                                    Oct 9, 2016 at 4:34 pm
                                    Mr. Chidambaram, nice advise. But few questions arise regarding 3% deficit limit targeting:lt;br/gt;lt;br/gt;1) Why did your government not follow it? lt;br/gt;2) Your party vice president is promoting loan waiver for all and sundry, and that is your party's main poll promise in UP, Punjab and elsewhere. Why not practice what you preach?lt;br/gt;3) You say "selling its stake in chronically loss-making public sector enterprises" is right. Your party blames Modi when he does that. Who is right?lt;br/gt;lt;br/gt;Now I appreciate you and your work. But it seems like you are working for the wrong party.
                                    1. M
                                      Oct 9, 2016 at 2:39 pm
                                      What is amazing about PC's articles in IE is that he has answers to all the problems plaguing India and week after week he criticizes Modi government, but during that time he and his party were in power, he never implemented any of the suggestions/recommendations he is mentioning now. Thank God, we got rid of him and his party.
                                      1. N
                                        Oct 9, 2016 at 5:54 am
                                        Why write third rate articles. Retire in peace.
                                        1. S
                                          Oct 9, 2016 at 2:33 pm
                                          Bustard Chiddu.........
                                          1. S
                                            Oct 9, 2016 at 2:32 pm
                                            why is this CHIDDU DOGGY still writing - This doggy alongwith IE will go down the drain!!
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