Step up to the fiscal challenge
With the latest figures on industrial output, the case for a stimulus is pressing.
Mutual discrimination will not carry us very far and the sooner we get a perspective on the strategy for this huge country, the better off we will all be.
It looked like the economy was about to sprout green shoots. The NITI Ayog and the finance ministry were optimistic. More than that visiting finance managers, the men who invest multiple billions, were rating India highly, talking about the mild industrial pick-up from March and the revival since. The governor of the Reserve Bank was also optimistic while urging more reforms. One was hoping to endorse all these sentiments. But the Central Statistics Office’s latest figures of the decline in investment rates in 2016 were too explicit to ignore.
The green shoots, it seems, were only in the statements. Inflation rates shot up to above 5 per cent in April and the trend persists. The week-long delay in the monsoon will also take its toll. The meteorological department (MET) should not say that the delayed monsoon will be made up by later rainfall. Most crops in the kharif season — apart from sugarcane — have a cropping season of 80 days or less. A delay of eight days, all things being equal, means a 10 per cent shortfall in yield. The MET says the monsoon is normal (as an econometrician I have never understood why they gave a forecast at 94 per cent probability levels) at 99 per cent probability levels.
With the latest figures on industrial output, the case for a fiscal stimulus is now pressing, unless we want to reconcile ourselves to a high growth economy led by a manufacturing growth rate of less than 3 per cent and an uncertain agrarian sector. GDP growth in manufacturing being higher than the index of industrial production implies that value added growth is improving with greater efficiency, but not the production of goods with which employment rises. The stimulus should focus on capital and intermediate goods’ demand which is suffering the most. It has to be fiscally neutral at the macro-level i.e. the increase in government spending has to be compensated by parallel resource raising efforts. There was, of course, the loose statement from Subramanian Swamy asking for interest rates to be reduced even though he is too good an economist not to know that the critical issue was the need for a fiscally-led initiative to raise public capital formation to bring in lagging private investment.
With the latest inflation figures, it would be risky to have agricultural demand pushing fiscal expenditure strategy. The pressure on domestic prices could soon translate into exchange rate difficulties. This would be bad news in the current volatile situation, particularly after Raghuram Rajan’s exit. Merits apart, ‘Rexit’ has affected market sentiment, as many global bankers have suggested. Keynes once said, in volatile markets sentiments are more important than facts.
India must be the only country in the non-socialist world where a cabinet secretary was to chair the selection of the governor of the central bank. Technically, the governor of the RBI is not a part of the order of precedence, but has a niche of his own and only policy illiterates would undermine his position.
A lot of learning seems to be needed at the highest levels. The first thing for policymakers to do is to take the country into confidence on their understanding of the macroeconomic perspective. While it has always been natural for the government of the day to paint a somewhat rosy macroeconomic picture, India’s economic policymakers have generally been frank on their detailed assessment of past difficulties and their perspective on expected outcomes and the policies they would follow. Coyness always leads to rumours — not a good thing for the economy.
Another casualty has been the lack of serious discussion at the official level of the devastating drought in parts of the country, in line with the MET’s story. Policymakers at the highest level, instead of explaining the seriousness of the situation and the requirements for action at the national, state and local levels, just ignore the facts. In Gujarat and in other parts of western and central India, after two years of continued drought, the water shortage was devastating. The rainfall deficit is high in western and eastern India. These are less irrigated areas and a normal monsoon in north-west India does not matter because the area is almost entirely irrigated. A reporter says the agriculture minister, when asked about this deficit, told him that farm incomes are to double in six years.
Unlike in the past, we have political leaders engaging in slanging matches with those who are opposed to them as a substitute for immediate policy action. We need a contingency plan in case the monsoon is not adequate in some areas. An action-based policy needs to be in position. In rain-deficit areas, good district collectors are already storing available water in village talavdis for drinking purposes and orders from above for releasing it for irrigation are being ignored. If the first crop fails, there has to be a detailed plan for the distribution of seeds and agricultural credit which becomes very critical for farmers to maximise their yield through nutrients for the second crop.
Mutual discrimination will not carry us very far and the sooner we get a perspective on the strategy for this huge country, the better off we will all be.
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