Once upon a time, the Reserve Bank of India was the ‘go to’ body for all matters economic. It was considered a cloistered institution, inaccessible to ordinary people, but independent and wise. Its reputation was unsullied despite many spectacular failures: the most notable failure was its inability to spot the financial scandal that stockbrokers and bank officials had brewed under its nose and robbed thousands of crores of rupees (1992). The recent failure was its connivance with the government, when the government embarked upon the reckless adventure of demonetisation (2016). The RBI has also been called wrong on many occasions in setting interest rates, but that is par for the course among central bankers!
Nevertheless, I believe that the RBI is a treasure house of knowledge. In particular, the Department of Economic Analysis and Policy and the Department of Statistical Analysis and Computer Services are the most reliable storehouses of data. Both departments have first-rate men and women who are capable of providing sound analysis and policy advice. The RBI’s monthly Bulletin is widely read and relied upon by bankers, economists, scholars and policymakers. It would be a pity if the RBI allowed its well-deserved reputation to be dimmed by either intellectual laziness or external compulsions.
Also read: Across the aisle by P Chidambaram: Law may stumble, justice will triumph
The RBI’s Bulletin for the month of March 2023 has the regular essay on State of the Economy. It carries the usual caveat that ‘views expressed in this article are those of the authors and do not represent the views of the Reserve Bank of India’. This is despite the fact that the authors belong to the Department of Economic Analysis and Policy and are led by Mr Michael Patra, currently Deputy Governor of RBI.
What concerned me was that the essay, which should have been a reasoned and sober assessment of the economy, has made rather extraordinary claims about the state of the economy. Here are some:
* The underlying strength of this expansion is evident in the persistence of elevated inflation.
While the strength of the labour market has come as a surprise, it is actually reflecting compositional shifts: leisure, hospitality, retail and healthcare are hiring at levels completely off-setting the jobs shed by tech-heavy companies.
* India has emerged from the pandemic years stronger than initially thought… Year-on-year growth rates do not reflect this pick-up of pace because by construction they are saddled with statistical base effects.
* What if at least 50% of the Rs 35,000 crore of tax relief proposed in the Union Budget is used by taxpayers for consumption and adds to private final consumption expenditure?
* What if even a third of the additional allocation of Rs 3.2 lakh crore budgeted for effective capital expenditure adds to gross fixed capital formation?
* Unlike the global economy, India would not slow down — it would maintain the pace of expansion achieved in 2022-23.
Also read: Across the aisle by P Chidambaram: Might and plight on display
Brave words indeed. Let’s examine the statements closely in the light of what we hear, see, read and experience. The contrary data are: * Inflation at an elevated level persists and has pushed down private consumption. * Jobs axed by tech companies are not the same as jobs available in the hospitality or retail industries. * Quarter upon quarter and even sequential quarters have recorded lower growth rates (Chart 12 of the essay). * The ‘what if’ arguments are totally speculative: what if the bulk of the Rs 35,000 crore is used to repay household debt? And what if the additional allocation cannot be spent by the states because of inability to fulfil the stringent conditions imposed by the Centre (as it happened in 2022-23)? * ‘India would not slow down’ is a startling prophecy by central bankers, as if India has de-coupled itself from the rest of the world.
I meet and speak to a lot of people from different walks of life. In recent days, I have met writers, lawyers, a hairdresser, MLAs representing rural constituencies, a former Mayor, a Tamil scholar, littérateurs, party workers, a medium enterprise owner, journalists, a headmaster, an NGO head, a hotelier and several young students. Not one of them expressed satisfaction with the economy. Their main concerns were inflation, unemployment, lay-offs, sluggish demand (especially exports) and subdued consumption.
Culling out the common points of distress, I have come to the conclusion that private consumption has slowed down and remains depressed. While government capital expenditure may have increased, government final consumption has decelerated. The hotelier runs a 21-room moderately-priced hotel in an industrial town. His average occupancy is 9-10 rooms or less than 50%. The SME owner supplies (against firm orders) semi-finished products to garment manufacturers and exporters. He has a 60-seat factory but he has to suspend production on some days a month. He narrated the story of a very successful business group that manufactures and supplies garments to international brand owners: their factories that were running for 7 days a week now run for 5 days a week. The industrial town has several hundred crores worth of stock and is offering discounts to foreign buyers. Germany has made it clear that no large export orders may be expected until next year. Both merchandise exports and imports have contracted. Borrowing costs are high and may go higher. New jobs are not being created in urban areas. The all India unemployment rate is 7.4% (CMIE).
What do you want to believe? The statistical and verbal spin of the RBI’s monthly Bulletin or your eyes, ears and instincts?