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Wednesday, February 19, 2020

3 Things

Our flagship daily news show, where hosts Neha Mathews and Shashank Bhargava talk to in-house experts about what is going on and why you need to care about it

Episode 732 February 7, 2020

RBI’s innovative new monetary policy review, defence pensions and the rural economy

Yesterday, the RBI released its latest monetary policy review. And while the repo rate remained unchanged, the central bank came out with a series of innovative policies in an effort to turn around the economy. In this segment, Udit Misra, talks about why this set of policies could be game changing. Next, Sushant Singh talks about why defence pensions have increased over the years (to the point that the government is spending more on it than education or health) and how it impacts the military and the economy (10:40). And last, Harish Damodaran talks about the ways in which the 2020 Budget fails to address the problems of the rural economy (16:30).
Transcript:
Shashank Bhargava
: Hi, I’m Shashank Bhargava and you’re listening to 3 Things, The Indian Express news show.

Since the 2020 Budget was announced on Saturday, we have been doing segments about various aspects of it. We began by taking an overview of it on Monday and talked about to what extent it will boost the economy. After that we have discussed whether NRIs be taxed differently, how the new income tax regime will affect savings and why the central govt has decided to divest a part of its stake in LIC.

In this episode, we will be taking a look at 2 other aspects of it. We will talk about the increase in defence pensions and how it affects military and the economy. We will also talk about in what ways the budget failed to address the problems of the rural economy.

But first we talk about the Reserve Bank of India.

Yesterday, the RBI released its latest monetary policy review. And while the main element of the review, the repo rate, remained unchanged, the RBI came out with a series of innovative policies in an effort to turn around the economy.

In this segment, Udit Misra, who writes in the economy for the Indian Express, talks why this set of policies could be a game changing.

[Music]

So Udit, yesterday the latest monetary policy review was unveiled. The main thing about review, which is suppose to be the repo rate, that did not change. In your piece you point out that the retail inflation has been at 7.35 per cent, which is high, so they could not have decreased the repo rate.You also mention that this inflation is being mostly seen as transient, so then they could not have increased it either, and which is what happened. And this is something what the Governor Shaktikanta Das also acknowledged. And yes, while the repo rate did not change, the RBI did reveal a long list of policies to boost economy, which you believe could be game changing. Could you talk about these policies and the kind of impact you think they will have?

Udit Misra: Right, So, it is true that on the face of it nothing seems to have happened. A lot of people have fallen for those headlines. But in my own understanding in the last 4-5 years that I’ve looked at monetary policy this closely, I do not remember a monetary policy which was this innovative and which really had so much vision and imagination behind it. It is in the true sense of credit policy. Typically, what has happened is that ever since the monetary policy committee came into being, which had 3 members nominated by the government and 3 members from the RBI, it has become a very state of staid affair. People vote or are unanimous. repo rate are cut or increased or whatever. And its become a boring affair at one level. This time because the situation was so tough, I would say that Governor Das and his RBI team has really risen to the occasion. And the first thought that came into my mind was that Governor Das has done a ‘Mahendra Singh Dhoni’. He’s basically taken the game, or at least what he’s trying to do, is to take the game deeper, longer, and see whether he can win it in the last over. And not lose it straight away.

Let me get to the specifics of this. What he’s done is that…yes on the face of it, he could not have changed repo, which is essentially the rate at which banks borrow from the RBI. But what he could do, and what he has done, is that he could change the extent to which he can provide repo. So one of the key things that he has done and for this, he didn’t need the monetary policy committee or any other approval, he said that we’ll do 1-year and 3-year repos. Now, you have to understand what is the repo. Repo is basically when a bank goes to the central bank and says give me X amount of money. And these are overnight transactions. So the bank says give it to me today, I’ll give it to you tomorrow. And the rates are set. The rates are repo and reverse repo. Now what the governor has said is that, I’ll do one year repo. Which is to say: you take it from me now, return to me one year later. Or take it from me now and give it to me 3 years later. How does that change? For a while now it has been the case that RBI has been cutting rates. Last whole year successively RBI cut rates, we sat here discussing how interest rates in the economy never fell, even though the repo rates fell.

Shashank Bhargava: The banks were not passing on that.

Udit Misra: Yeah, so monetary policy transition was not happening. Now, the problem with that was that most banks said that, ‘Listen, I take only a very small portion of my funds from the RBI. So even if the rate falls on that portion of RBI of my funds, my overall cost of funds remains high because I’m stuck in the high cost loans. I’ve already taken loans and I’ve already borrowed money at a very high cost and I’m in that economy’. What the RBI is done today is that it has done that 1-year and 3-year repo and it has done it to the extent of 1 lakh crores. That is the amount of money that it has allocated. It’s still not such a big amount, honesty. But it is a big enough amount to give a great signal and to at least push a lot of funding. Why? Imagine there was only one bank. So the bank can go to RBI and say okay give me 1 lakh crore, I will pay it back to you in 3 years time. So, now the bank has 1 lakh crore at 5.15% right? So, as of now, you and I pay somewhere between 8 to maybe 13-14% on different types of loans. But here is a bank which is getting 1 lakh crores at 5.15%. Imagine if it was to put some mark up but even so, give the loan at, you know, 6% or 7%, 7.5%, I don’t know. But there’ll be a substantial decline in the overall interest rate of the new loans. Now, that immediately makes a lot of funds, a lot of projects viable because the capital is coming cheaper, and so the project is more viable. That’s the key big decision.

Shashank Bhargava: This is actually what was supposed to happen in previous repo rate cuts but did not happen.

Udit Misra: It didn’t happen because repo rate was a) overnight thing and secondly, repos were very small amount of money was involved. Other than the repo, which is a huge thing and very imaginative, other than that what the RBI is done is that it has held back the CRR requirements for lending to certain key sectors of the economy. So what is CRR. CRR is Cash Reserve Ratio. Cash Reserve Ratio is basically saying that to a bank, RBI says, whatever you may hold, I will keep a certain portion of it. You will have to keep it with me. That’s like a security, you know. Now every time the RBI wants to push for lending, it reduces the CRR. Because the lower the CRR, the more funds available for the banks to lend further. And in times of high inflation generally the RBI raises CRR right? So that the money, not more money is created. Not more lending is done, and you pull back the money. What RBI is done today is quite contrary to what it typically does in a high inflation system.

Shashank Bhargava: Is it because it’s seeing again the inflation to be transient?

Udit Misra: Yes, exactly. That is one. So it has finally said that listen, this inflation will come and go, but I need to take care of certain sectors of the economy where lending must happen. And it should happen in the next 3 to 6 months. So it has said that if you give loans between now and July, or whatever, all the incremental lending to say, loans for automobiles…so the loans that you might take for your own car, for housing, or for MSMEs, when they asked for loans, retail loans. If banks give those things, they don’t have to hold on to the CRR number, right? They can be exempt from that. Now, this is a huge thing because all of a sudden, the banks have more money…again this is a very imaginative solution, you know, because you’ve not cut CRR. It just held it back for certain sectors. So it’s very directed, focused attack at what is the problem.

Shashank Bhargava: So in both these senses, the banks have more money and eventually people have more money.

Udit Misra: And similarly there have been greater leniency shown to loans which are apparently going bad, are turning NPAs. In MSMEs, in commercial real estate and stuff, and RBI has said ‘no worries, we’ll push it forward. We give you a 1 year extension’, right? ‘We’ll see…you are allowed to do some restructuring. We’ll see it next year’. Now what that does is that…what is that assessment? That is assessment that the broader economy has turned negative, and it is bringing down a lot of projects which may not be failing just because they are either crooks or they are fundamentally flawed models. They may be failing because the broader economy is failing and then there’s credit crunch. So they have said that, this is what I said the Dhoni touch, that you know, just let it survive for another year. Give it another 6 months, give it another round of funding and let’s see where we are. This is called regulatory forbearance. That okay, ‘I’ll be tolerant right now, even though you are defaulting. But I will just look the other way. You carry on, let’s see where it goes’.

Shashank Bhargava: Instead of them turning into NPAs which is…

Udit Misra: …if they turn NPAs, who gains at one level? They turn NPAs, you can sell a thing, but who who’s going to buy in this market? Who’s going to get any money? Nobody’s gonna get the commercial real estate or the MSME will be down. This is exactly what I’m saying, it’s the art of the possible. This is exactly the kind of approach that many expected Nirmala Sitharaman, the Finance Minister, to have for her budget. But RBI governor has shown tremendous imagination and innovation in policymaking. And there was one sentence that he said that, in the very beginning, where he said that, I know that the markets have already discounted the no change in the repo rate, but you can never discount the Reserve Bank of India. And that statement will go down in history as one of the very strong statements about what RBI can do, on the day it decides to do it.

Shashank Bhargava: Is there a lot of gamble involved in this?

Udit Misra: There is a gamble involved in it. Yes, of course.

Shashank Bhargava: Because all of this, a lot of this, assumes that ‘Hey, this inflation, it will go away.’

Udit Misra: Definitely. Every time you bring down prudential norms, there is a gamble involved in it. But you have to see it again as what we can do. It’s a very ‘can do’ approach. ‘Let’s see what we can do’. ‘Let’s have a result oriented frame’. At least he’s trying to do something. And yes, things can go bad if these bets don’t take off. But there is a very good chance that if these bets do take off, then things will improve. And that’s the kind of hope and agility we need in policymaking at this current juncture of the economy.

[Music]

Shashank Bhargava: Next, we talk about Defence pensions.

Over the years, Defence pensions have been increasing. This time in the budget around Rs.1,33,000 crore were allocated to it. To put things in perspective, the government is spending less on both education and on health, compared to these pensions.

In this segment, Sushant Singh, Indian Express’s Deputy Editor joins us to talk about what has led to its increase and how it affects the military.

[Music]

So Sushant, you point out that the money that has been allocated to defence pensions has increased by 10 and a half times in a decade and a half. This time around Rs.1,33,000 crore has been allocated to it. This is obviously a huge number. Could you first talk about how does this compare to other programmes and projects that the government spends on?

Sushant Singh: See just to give you an idea, the total money that Pakistan spends on its defence, including its defence pension, is less than what India spends alone on defence pensions. You know, Pakistan is our biggest adversary and Pakistan spends less on its overall defence than we spend on defence pensions. That should give you an idea. Individually it is more than NREGA, it is more than double that of NREGA, the Swachh Bharat scheme is some 10,000 odd crores…the education is some 90,000 crore, health budget but is some 66,000 crores.

So the defence pensions perhaps to my mind has more expenditure than anything else that deals with development sector or any other such sector. Now, the important thing to remember is that defence pensions by themselves are not a productive investment. When you invest in education, when you invest in health, when you invest in cleanliness or when you invest in Rural Employment Guarantee scheme, you are actually investing in society, you are investing in government and the fruits of those are seen in decades and years to come. In terms of defence pensions, it is almost as the Supreme Court had once said, ‘pensions are delayed salaries’ in that sense. That because somebody served for 20 years in the Army or 18 years in the case of a jawaan, he has to be paid over a period of time, as a form of social security, as a form of some kind of a assurance that having given his youth for the country, he’ll be looked after by the government.

Shashank Bhargava: So what exactly has led to this rise? And what kind of problems does this end up causing?

Sushant Singh: There are two things which have led to its rise. One is the simple fact that the soldiers retire at a pretty young age. Most of the jawaans would retire at the age of 35-37 years of age, and the life expectancy in India has continued to increase. People now live around 70-75 years. So you are for every serving personnel, you actually have 1.7 times the retired military personnel. Which is reserve in the case of civilian employees. There is a 0.6 retired civilian employee to every serving civilian employee. The issue of 1.7 to 1 is increasing by the day because jawaans retire early, soldiers retire early and they continue to live far longer. Secondly, because of the various pay commissions and the One Rank, One Pension scheme, which Mr. Modi’s government approved in 2015. The pension scheme or the amount for the pensions has increased dramatically and is continuing to increase by the day. It is the spike in defence pensions which is taking place that is really worrisome. Every financial year it is increasing by some 15-16-18,000 crores, which is like a huge number.

Shashank Bhargava: What kind of reforms have we seen being proposed in this regard? Like you mentioned, early retirement being a major contributor. Have there been any talks about say increasing the period that one serves?

Sushant Singh: So far officially, there’s been nothing which has been done. Although the parliamentary standing committees have spoken about retired military personnel being taken to paramilitary forces. For over the last two, two and a half decades this has been proposed but that has been shot down by the paramilitary forces, as they also want to stay young. They do not want older people. General Rawat, when I met him couple of days back, the Chief of Defence Staff General Rawat, he had spoken about if at least the one-third of the army could continue to serve far longer till the age of 58, while the rest of the army continues to remain young, to bring it down. In the case of civilians, during Mr. Vajpayee’s government, the assured pension scheme which the government gives, was removed and was replaced by a contributory pension scheme. So civilian employees in India, since the early 2000s, only contribute to their pension and get what they’ve contributed. But military personnel continue to be guaranteed a pension by the government. That reform eventually I think will have to be brought in in defence pensions, if defence pensions have to be controlled.

Shashank Bhargava: You know, previously on the podcast, you’ve mentioned that the defence spending is on an all time low. And so much of the money being allocated to pensions and you know, operating expenses, in what way does it affect the army and the army personnel?

Sushant Singh: See, the simple fact is that the biggest impact…one is the larger economic effect of the spending on defence pensions, as we just discussed, it is in some ways unproductive and it is in some ways impinging on money that should be ideally be spent on development, for infrastructure development or health or education or any of those pressing requirement that a poor country like India has. The second impact is on the defence service itself. If the overall pie that can be allocated to defence is not increasing and the larger share of it is going to defence pensions, then the defence services are not getting modernised. The process of military modernization takes a backseat. It is not getting modernised fast enough and the vintage equipment that the Indian Armed Forces have is increasing by the day. So it’s a double whammy. The military doesn’t get modernised and the larger overall economy in this society suffers because money is not being directed towards more productive means.

[Music]

IShashank Bhargava: In the end, we talk about the rural economy. This budget, in many ways, did not quite address the problems and the distresses of the rural sector. Harish Damodaran, Indian Express’s, Rural Affairs editor, talks about what stood out for him during this years announcements.

Harish Damodaran: Actually strangely nothing much was done in the budget. You don’t see any coherent vision or anything of that kind. Whether it is in terms of subsidies…like for example, you find that the subsidy on fertilisers has actually been cut compared to last year. Okay, it’s about 10,000 crore less. But then there is no announcement of any increase in urea prices or anything of that kind. Same as the case with food subsidy. The food subsidy bill in the revised estimates is about something like 90,000 crore less than what was in the budget estimates. So a lot of things are hidden. It’s not clear how are they cutting the subsidies. Because you’ve not announced any increase in urea prices, you’ve not announced any increase in the issue prices of wheat or rice which is distributed through the public distribution system, and you have not said whether you will freeze minimum support prices or whether you will rationalise procurement of wheat and paddy.

So it’s not clear you know. You don’t get a full feeling of what they intend to do. So probably you might see a lot of things happening in the off-budget kind of a thing, you know. So maybe the budget is not the place where you see action as far as agriculture and rural and all is concerned. Definitely nothing coherent comes out.

Shashank Bhargava: I mean, this time when talk the budget allocated to MGNREGA, it was about Rs 61,500 crore, which is up from 60,000 crore which announced in July, but if we were to compare it from last year…

Harish Damodaran: …the revised estimate I think was about 70,000 crore or something.

Shashank Bhargava: 71,000.

Harish Damodaran: Yeah, 71,000.

Shashank Bhargava: So, what is the reason for these allocations decreasing?

Harish Damodaran: See, I think overall it is a budgetary constraint. I think the Prime Minister, Mr. Narendra Modi was very clear that the fiscal deficit cannot exceed 4% of GDP. He was not willing to do that. So because of that, I think many of the big ticket items, you won’t see more allocations, you know. So whether it is a PM Kisan, whether it is MGNREGA, all the flagship schemes, I think they have gone slow on the whole thing. Though probably it can be argued that if you were to spend more money on MGNREGA or on PM Kisan, it will definitely create a bigger stimulus than maybe even infrastructure. Because if you give money to a poor person or a relatively low income person, that person is more likely to spend it immediately, you know. So to stimulate consumption that would have probably been the best way out.

Shashank Bhargava: I just want to point out to our listeners that MGNREGA basically guarantees at least 100 days of employment to adults of every rural household.

Harish Damodaran: Yes, that’s right. Every family is assured of a 100 days of employment at the minimum wage kind of thing. So I think there is not been much of a step up in outlay. And probably for that, you have to look at the macros. I think the macros were very clear. I think it was a political call, not to increase the fiscal deficit much. So because of that, obviously. So all these programmes they have suffered. But I’m more intrigued by what they have done in the case of the subsidies and this kind of a thing.

So it would be interesting to see what happens off-budget, you know. Once the budget session is over. Like what are they going to do, for example, with a crop that is now going to be harvested after April, you know? The wheat crop? I think it’s going to be a super bumper crop this year because the weather has been very good. There is enough availability of water. It’s been a very chilly winter. So I expect the wheat production to go up definitely maybe to 115 million tons or something. So are you going to procure that entire grain? Because if you were to procure, I think, you’ll end up procuring about 14 million tonnes. The crop is so good. At the same time, your food subsidy bill is lower compared to last year. So somewhere it doesn’t add up.

Shashank Bhargava: So what are the kind of things that when we look at the kind of distress that the rural economy has been going through? What are the kinds of things that you think the government can focus on now or you think the budget should have directly addressed?

Harish Damodaran: See, I think in the budget if they had announced something to the effect that from now all stocking controls are to go away. All export controls are to go away. An announcement of this kind, that save in the case of an extreme national calamity or war, controls will not be imposed. I think they would have been a lot of credibility in that kind of a thing. So even if you don’t do anything, you know, the very announcement that, you know, we want to liberalise the sector, we want investments in the sector, we look at rural areas as a place where we want to attract investments. I think modi government has been very aggressive when it comes to infrastructure. Very rightfully so. So they’ve given all kinds of Sops right? Including for sovereign wealth funds. All kinds of tax exemptions and all. If that same intent had been shown in agriculture…and I think this would have been the just the right time because we are going to harvest a bumper crop. I think after April, you’re going to see a lot of new crop coming in. I think the last monsoon was very good, you know, especially in the tail end, you know. So I think this would have had a lot of impact on sentiment and all these things.

And I’ve been maintaining right from the beginning that, you know, the slowdown started in rural India. And it can only end in rural India. I think this is something they could definitely have announced. And also, I think something on the subsidies, it would have been worth announcing these kind of things, you know. See, if you’re saying that I don’t have money, I don’t want to splurge, I know I cannot expand, then at least you should announce some kind of supply side reforms, right? Which won’t cost you anything. If you say that ‘I’m going to free the agricultural markets, I’m going to allow farmers the freedom to sell anywhere to anyone’, you know, and just that statement, you know, it would have made a lot of difference, I think, to sentiment and everything. Especially now, when prices are sort of recovering. I would say that crop prices have sort of bottomed out, you know. So it would have created a lot of sentiment and I think it would have made a difference. And to that extent, this opportunity has been squandered. And you end up with all kinds of announcements, you know, and a coherent vision is what I think the budget lacks, for rural India of course, but overall also.


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RBI’s innovative new monetary policy review, defence pensions and the rural economyYesterday, the RBI released its latest monetary policy review. And while the repo rate remained unchanged, the central bank came out with a series of innovative policies in an effort to turn around the economy. In this segment, Udit Misra, talks about why this set of policies could be game changing. Next, Sushant Singh talks about why defence pensions have increased over the years (to the point that the government is spending more on it than education or health) and how it impacts the military and the economy (10:40). And last, Harish Damodaran talks about the ways in which the 2020 Budget fails to address the problems of the rural economy (16:30). Transcript: Shashank Bhargava: Hi, I'm Shashank Bhargava and you're listening to 3 Things, The Indian Express news show. Since the 2020 Budget was announced on Saturday, we have been doing segments about various aspects of it. We began by taking an overview of it on Monday and talked about to what extent it will boost the economy. After that we have discussed whether NRIs be taxed differently, how the new income tax regime will affect savings and why the central govt has decided to divest a part of its stake in LIC. In this episode, we will be taking a look at 2 other aspects of it. We will talk about the increase in defence pensions and how it affects military and the economy. We will also talk about in what ways the budget failed to address the problems of the rural economy. But first we talk about the Reserve Bank of India. Yesterday, the RBI released its latest monetary policy review. And while the main element of the review, the repo rate, remained unchanged, the RBI came out with a series of innovative policies in an effort to turn around the economy. In this segment, Udit Misra, who writes in the economy for the Indian Express, talks why this set of policies could be a game changing. [Music] So Udit, yesterday the latest monetary policy review was unveiled. The main thing about review, which is suppose to be the repo rate, that did not change. In your piece you point out that the retail inflation has been at 7.35 per cent, which is high, so they could not have decreased the repo rate.You also mention that this inflation is being mostly seen as transient, so then they could not have increased it either, and which is what happened. And this is something what the Governor Shaktikanta Das also acknowledged. And yes, while the repo rate did not change, the RBI did reveal a long list of policies to boost economy, which you believe could be game changing. Could you talk about these policies and the kind of impact you think they will have? Udit Misra: Right, So, it is true that on the face of it nothing seems to have happened. A lot of people have fallen for those headlines. But in my own understanding in the last 4-5 years that I've looked at monetary policy this closely, I do not remember a monetary policy which was this innovative and which really had so much vision and imagination behind it. It is in the true sense of credit policy. Typically, what has happened is that ever since the monetary policy committee came into being, which had 3 members nominated by the government and 3 members from the RBI, it has become a very state of staid affair. People vote or are unanimous. repo rate are cut or increased or whatever. And its become a boring affair at one level. This time because the situation was so tough, I would say that Governor Das and his RBI team has really risen to the occasion. And the first thought that came into my mind was that Governor Das has done a 'Mahendra Singh Dhoni'. He's basically taken the game, or at least what he's trying to do, is to take the game deeper, longer, and see whether he can win it in the last over. And not lose it straight away. Let me get to the specifics of this. What he's done is that...yes on the face of it, he could not have changed repo, which is essentially the rate at which banks borrow from the RBI. But what he could do, and what he has done, is that he could change the extent to which he can provide repo. So one of the key things that he has done and for this, he didn't need the monetary policy committee or any other approval, he said that we'll do 1-year and 3-year repos. Now, you have to understand what is the repo. Repo is basically when a bank goes to the central bank and says give me X amount of money. And these are overnight transactions. So the bank says give it to me today, I'll give it to you tomorrow. And the rates are set. The rates are repo and reverse repo. Now what the governor has said is that, I'll do one year repo. Which is to say: you take it from me now, return to me one year later. Or take it from me now and give it to me 3 years later. How does that change? For a while now it has been the case that RBI has been cutting rates. Last whole year successively RBI cut rates, we sat here discussing how interest rates in the economy never fell, even though the repo rates fell. Shashank Bhargava: The banks were not passing on that. Udit Misra: Yeah, so monetary policy transition was not happening. Now, the problem with that was that most banks said that, 'Listen, I take only a very small portion of my funds from the RBI. So even if the rate falls on that portion of RBI of my funds, my overall cost of funds remains high because I'm stuck in the high cost loans. I've already taken loans and I've already borrowed money at a very high cost and I'm in that economy'. What the RBI is done today is that it has done that 1-year and 3-year repo and it has done it to the extent of 1 lakh crores. That is the amount of money that it has allocated. It's still not such a big amount, honesty. But it is a big enough amount to give a great signal and to at least push a lot of funding. Why? Imagine there was only one bank. So the bank can go to RBI and say okay give me 1 lakh crore, I will pay it back to you in 3 years time. So, now the bank has 1 lakh crore at 5.15% right? So, as of now, you and I pay somewhere between 8 to maybe 13-14% on different types of loans. But here is a bank which is getting 1 lakh crores at 5.15%. Imagine if it was to put some mark up but even so, give the loan at, you know, 6% or 7%, 7.5%, I don't know. But there'll be a substantial decline in the overall interest rate of the new loans. Now, that immediately makes a lot of funds, a lot of projects viable because the capital is coming cheaper, and so the project is more viable. That's the key big decision. Shashank Bhargava: This is actually what was supposed to happen in previous repo rate cuts but did not happen. Udit Misra: It didn't happen because repo rate was a) overnight thing and secondly, repos were very small amount of money was involved. Other than the repo, which is a huge thing and very imaginative, other than that what the RBI is done is that it has held back the CRR requirements for lending to certain key sectors of the economy. So what is CRR. CRR is Cash Reserve Ratio. Cash Reserve Ratio is basically saying that to a bank, RBI says, whatever you may hold, I will keep a certain portion of it. You will have to keep it with me. That's like a security, you know. Now every time the RBI wants to push for lending, it reduces the CRR. Because the lower the CRR, the more funds available for the banks to lend further. And in times of high inflation generally the RBI raises CRR right? So that the money, not more money is created. Not more lending is done, and you pull back the money. What RBI is done today is quite contrary to what it typically does in a high inflation system. Shashank Bhargava: Is it because it's seeing again the inflation to be transient? Udit Misra: Yes, exactly. That is one. So it has finally said that listen, this inflation will come and go, but I need to take care of certain sectors of the economy where lending must happen. And it should happen in the next 3 to 6 months. So it has said that if you give loans between now and July, or whatever, all the incremental lending to say, loans for automobiles...so the loans that you might take for your own car, for housing, or for MSMEs, when they asked for loans, retail loans. If banks give those things, they don't have to hold on to the CRR number, right? They can be exempt from that. Now, this is a huge thing because all of a sudden, the banks have more money...again this is a very imaginative solution, you know, because you've not cut CRR. It just held it back for certain sectors. So it's very directed, focused attack at what is the problem. Shashank Bhargava: So in both these senses, the banks have more money and eventually people have more money. Udit Misra: And similarly there have been greater leniency shown to loans which are apparently going bad, are turning NPAs. In MSMEs, in commercial real estate and stuff, and RBI has said 'no worries, we'll push it forward. We give you a 1 year extension', right? 'We'll see...you are allowed to do some restructuring. We'll see it next year'. Now what that does is that...what is that assessment? That is assessment that the broader economy has turned negative, and it is bringing down a lot of projects which may not be failing just because they are either crooks or they are fundamentally flawed models. They may be failing because the broader economy is failing and then there's credit crunch. So they have said that, this is what I said the Dhoni touch, that you know, just let it survive for another year. Give it another 6 months, give it another round of funding and let's see where we are. This is called regulatory forbearance. That okay, 'I'll be tolerant right now, even though you are defaulting. But I will just look the other way. You carry on, let's see where it goes'. Shashank Bhargava: Instead of them turning into NPAs which is... Udit Misra: ...if they turn NPAs, who gains at one level? They turn NPAs, you can sell a thing, but who who's going to buy in this market? Who's going to get any money? Nobody's gonna get the commercial real estate or the MSME will be down. This is exactly what I'm saying, it's the art of the possible. This is exactly the kind of approach that many expected Nirmala Sitharaman, the Finance Minister, to have for her budget. But RBI governor has shown tremendous imagination and innovation in policymaking. And there was one sentence that he said that, in the very beginning, where he said that, I know that the markets have already discounted the no change in the repo rate, but you can never discount the Reserve Bank of India. And that statement will go down in history as one of the very strong statements about what RBI can do, on the day it decides to do it. Shashank Bhargava: Is there a lot of gamble involved in this? Udit Misra: There is a gamble involved in it. Yes, of course. Shashank Bhargava: Because all of this, a lot of this, assumes that 'Hey, this inflation, it will go away.' Udit Misra: Definitely. Every time you bring down prudential norms, there is a gamble involved in it. But you have to see it again as what we can do. It's a very 'can do' approach. 'Let's see what we can do'. 'Let's have a result oriented frame'. At least he's trying to do something. And yes, things can go bad if these bets don't take off. But there is a very good chance that if these bets do take off, then things will improve. And that's the kind of hope and agility we need in policymaking at this current juncture of the economy. [Music] Shashank Bhargava: Next, we talk about Defence pensions. Over the years, Defence pensions have been increasing. This time in the budget around Rs.1,33,000 crore were allocated to it. To put things in perspective, the government is spending less on both education and on health, compared to these pensions. In this segment, Sushant Singh, Indian Express's Deputy Editor joins us to talk about what has led to its increase and how it affects the military. [Music] So Sushant, you point out that the money that has been allocated to defence pensions has increased by 10 and a half times in a decade and a half. This time around Rs.1,33,000 crore has been allocated to it. This is obviously a huge number. Could you first talk about how does this compare to other programmes and projects that the government spends on? Sushant Singh: See just to give you an idea, the total money that Pakistan spends on its defence, including its defence pension, is less than what India spends alone on defence pensions. You know, Pakistan is our biggest adversary and Pakistan spends less on its overall defence than we spend on defence pensions. That should give you an idea. Individually it is more than NREGA, it is more than double that of NREGA, the Swachh Bharat scheme is some 10,000 odd crores...the education is some 90,000 crore, health budget but is some 66,000 crores. So the defence pensions perhaps to my mind has more expenditure than anything else that deals with development sector or any other such sector. Now, the important thing to remember is that defence pensions by themselves are not a productive investment. When you invest in education, when you invest in health, when you invest in cleanliness or when you invest in Rural Employment Guarantee scheme, you are actually investing in society, you are investing in government and the fruits of those are seen in decades and years to come. In terms of defence pensions, it is almost as the Supreme Court had once said, 'pensions are delayed salaries' in that sense. That because somebody served for 20 years in the Army or 18 years in the case of a jawaan, he has to be paid over a period of time, as a form of social security, as a form of some kind of a assurance that having given his youth for the country, he'll be looked after by the government. Shashank Bhargava: So what exactly has led to this rise? And what kind of problems does this end up causing? Sushant Singh: There are two things which have led to its rise. One is the simple fact that the soldiers retire at a pretty young age. Most of the jawaans would retire at the age of 35-37 years of age, and the life expectancy in India has continued to increase. People now live around 70-75 years. So you are for every serving personnel, you actually have 1.7 times the retired military personnel. Which is reserve in the case of civilian employees. There is a 0.6 retired civilian employee to every serving civilian employee. The issue of 1.7 to 1 is increasing by the day because jawaans retire early, soldiers retire early and they continue to live far longer. Secondly, because of the various pay commissions and the One Rank, One Pension scheme, which Mr. Modi's government approved in 2015. The pension scheme or the amount for the pensions has increased dramatically and is continuing to increase by the day. It is the spike in defence pensions which is taking place that is really worrisome. Every financial year it is increasing by some 15-16-18,000 crores, which is like a huge number. Shashank Bhargava: What kind of reforms have we seen being proposed in this regard? Like you mentioned, early retirement being a major contributor. Have there been any talks about say increasing the period that one serves? Sushant Singh: So far officially, there's been nothing which has been done. Although the parliamentary standing committees have spoken about retired military personnel being taken to paramilitary forces. For over the last two, two and a half decades this has been proposed but that has been shot down by the paramilitary forces, as they also want to stay young. They do not want older people. General Rawat, when I met him couple of days back, the Chief of Defence Staff General Rawat, he had spoken about if at least the one-third of the army could continue to serve far longer till the age of 58, while the rest of the army continues to remain young, to bring it down. In the case of civilians, during Mr. Vajpayee's government, the assured pension scheme which the government gives, was removed and was replaced by a contributory pension scheme. So civilian employees in India, since the early 2000s, only contribute to their pension and get what they've contributed. But military personnel continue to be guaranteed a pension by the government. That reform eventually I think will have to be brought in in defence pensions, if defence pensions have to be controlled. Shashank Bhargava: You know, previously on the podcast, you've mentioned that the defence spending is on an all time low. And so much of the money being allocated to pensions and you know, operating expenses, in what way does it affect the army and the army personnel? Sushant Singh: See, the simple fact is that the biggest impact...one is the larger economic effect of the spending on defence pensions, as we just discussed, it is in some ways unproductive and it is in some ways impinging on money that should be ideally be spent on development, for infrastructure development or health or education or any of those pressing requirement that a poor country like India has. The second impact is on the defence service itself. If the overall pie that can be allocated to defence is not increasing and the larger share of it is going to defence pensions, then the defence services are not getting modernised. The process of military modernization takes a backseat. It is not getting modernised fast enough and the vintage equipment that the Indian Armed Forces have is increasing by the day. So it's a double whammy. The military doesn't get modernised and the larger overall economy in this society suffers because money is not being directed towards more productive means. [Music] IShashank Bhargava: In the end, we talk about the rural economy. This budget, in many ways, did not quite address the problems and the distresses of the rural sector. Harish Damodaran, Indian Express's, Rural Affairs editor, talks about what stood out for him during this years announcements. Harish Damodaran: Actually strangely nothing much was done in the budget. You don't see any coherent vision or anything of that kind. Whether it is in terms of subsidies...like for example, you find that the subsidy on fertilisers has actually been cut compared to last year. Okay, it's about 10,000 crore less. But then there is no announcement of any increase in urea prices or anything of that kind. Same as the case with food subsidy. The food subsidy bill in the revised estimates is about something like 90,000 crore less than what was in the budget estimates. So a lot of things are hidden. It's not clear how are they cutting the subsidies. Because you've not announced any increase in urea prices, you've not announced any increase in the issue prices of wheat or rice which is distributed through the public distribution system, and you have not said whether you will freeze minimum support prices or whether you will rationalise procurement of wheat and paddy. So it's not clear you know. You don't get a full feeling of what they intend to do. So probably you might see a lot of things happening in the off-budget kind of a thing, you know. So maybe the budget is not the place where you see action as far as agriculture and rural and all is concerned. Definitely nothing coherent comes out. Shashank Bhargava: I mean, this time when talk the budget allocated to MGNREGA, it was about Rs 61,500 crore, which is up from 60,000 crore which announced in July, but if we were to compare it from last year... Harish Damodaran: ...the revised estimate I think was about 70,000 crore or something. Shashank Bhargava: 71,000. Harish Damodaran: Yeah, 71,000. Shashank Bhargava: So, what is the reason for these allocations decreasing? Harish Damodaran: See, I think overall it is a budgetary constraint. I think the Prime Minister, Mr. Narendra Modi was very clear that the fiscal deficit cannot exceed 4% of GDP. He was not willing to do that. So because of that, I think many of the big ticket items, you won't see more allocations, you know. So whether it is a PM Kisan, whether it is MGNREGA, all the flagship schemes, I think they have gone slow on the whole thing. Though probably it can be argued that if you were to spend more money on MGNREGA or on PM Kisan, it will definitely create a bigger stimulus than maybe even infrastructure. Because if you give money to a poor person or a relatively low income person, that person is more likely to spend it immediately, you know. So to stimulate consumption that would have probably been the best way out. Shashank Bhargava: I just want to point out to our listeners that MGNREGA basically guarantees at least 100 days of employment to adults of every rural household. Harish Damodaran: Yes, that's right. Every family is assured of a 100 days of employment at the minimum wage kind of thing. So I think there is not been much of a step up in outlay. And probably for that, you have to look at the macros. I think the macros were very clear. I think it was a political call, not to increase the fiscal deficit much. So because of that, obviously. So all these programmes they have suffered. But I'm more intrigued by what they have done in the case of the subsidies and this kind of a thing. So it would be interesting to see what happens off-budget, you know. Once the budget session is over. Like what are they going to do, for example, with a crop that is now going to be harvested after April, you know? The wheat crop? I think it's going to be a super bumper crop this year because the weather has been very good. There is enough availability of water. It's been a very chilly winter. So I expect the wheat production to go up definitely maybe to 115 million tons or something. So are you going to procure that entire grain? Because if you were to procure, I think, you'll end up procuring about 14 million tonnes. The crop is so good. At the same time, your food subsidy bill is lower compared to last year. So somewhere it doesn't add up. Shashank Bhargava: So what are the kind of things that when we look at the kind of distress that the rural economy has been going through? What are the kinds of things that you think the government can focus on now or you think the budget should have directly addressed? Harish Damodaran: See, I think in the budget if they had announced something to the effect that from now all stocking controls are to go away. All export controls are to go away. An announcement of this kind, that save in the case of an extreme national calamity or war, controls will not be imposed. I think they would have been a lot of credibility in that kind of a thing. So even if you don't do anything, you know, the very announcement that, you know, we want to liberalise the sector, we want investments in the sector, we look at rural areas as a place where we want to attract investments. I think modi government has been very aggressive when it comes to infrastructure. Very rightfully so. So they've given all kinds of Sops right? Including for sovereign wealth funds. All kinds of tax exemptions and all. If that same intent had been shown in agriculture...and I think this would have been the just the right time because we are going to harvest a bumper crop. I think after April, you're going to see a lot of new crop coming in. I think the last monsoon was very good, you know, especially in the tail end, you know. So I think this would have had a lot of impact on sentiment and all these things. And I've been maintaining right from the beginning that, you know, the slowdown started in rural India. And it can only end in rural India. I think this is something they could definitely have announced. And also, I think something on the subsidies, it would have been worth announcing these kind of things, you know. See, if you're saying that I don't have money, I don't want to splurge, I know I cannot expand, then at least you should announce some kind of supply side reforms, right? Which won't cost you anything. If you say that 'I'm going to free the agricultural markets, I'm going to allow farmers the freedom to sell anywhere to anyone', you know, and just that statement, you know, it would have made a lot of difference, I think, to sentiment and everything. Especially now, when prices are sort of recovering. I would say that crop prices have sort of bottomed out, you know. So it would have created a lot of sentiment and I think it would have made a difference. And to that extent, this opportunity has been squandered. And you end up with all kinds of announcements, you know, and a coherent vision is what I think the budget lacks, for rural India of course, but overall also. You can follow us and leave us feedback on Facebook and Twitter @expresspodcasts, or send us an email at podcasts@indianexpress.com. If you like this show, please subscribe and leave us a review wherever you get your podcasts, so other people can find us. You can also find us on http://www.indianexpress.com/audio.