Column: Jaago aur jaagte raho

The GDP price deflator is negative, personal consumption deflator at a record low. Yet, pulses don’t allow a rate cut

Economic life is expected to return to normal now that the Fed rate hike of 25 basis points is done with and out of the way. Normal economic plans can now be made. Simultaneously, in India, the Goods and Services Tax (GST) Bill is not happening—at least in this session of Parliament. There are lessons to be learnt for the BJP and the Congress regarding the GST tamasha. Due to the Congress changing the goal posts so often, one is left with the impression that the party would rather go into oblivion than pass the GST Bill.

It has been amusing to hear Congress speak regarding the non-passage of the Bill. They first started, much like a cry-baby, by saying, “Mommy, mommy, look he is not even talking to me!” The BJP obliged, held discussions with the Congress leadership, and it looked like the GST might pass. The Congress also laid down their three preconditions for passage of the bill —removal of the 1%-transfer tax (accepted by the BJP) , GST rate less than 18 % (the BJP agreed to even a lower rate). The third demand was something to do with a dispute resolution mechanism—the Congress reasons for this strange “demand” are too embarrassing for a family newspaper to even print. So, what is holding up the passage of the GST—nothing, except the cry-baby Congress.

The best way to deal with an obstreperous baby, as all parents know, is to ignore it. The attitude of the BJP towards both the Congress and the GST should be—we don’t care. And have some pity for the Congress—unka sab kho gaya, wo bechare ab kya karen? (Those who have lost everything, what else can they do?). All they can do is jump up and down, shout slogans, obstruct parliament, and behave like a juvenile party. Oh look, how the mighty have fallen.
The BJP and PM Modi should concentrate fully on the economy, and instead of “big ticket” items which the juvenile can obstruct, they should be more pedestrian, go for the mundane, but productive, policy action—like providing a comprehensive insurance package for farmers (can the Congress dare oppose it?), working together with RBI to provide a package for the stressed banks, working towards streamlining the corporate tax rates, modernising the personal income tax system, using Aadhaar for reducing massive corruption in schemes like NREGA and food distribution, and accelerating reforms needed for ease of doing business.

As it happens, the Modi government has plans on all of the above “in the works”. Soon foreign investors, and domestic investors, will forget about the GST. And then, where would the Congress be?

The BJP realises (I think) that the Indian economy, despite many negative doomsayers and doom-forecasters, is poised to be much stronger next year. The best news for the Indian economy has gone mostly unnoticed. Inflation was so low that it was negative (GDP deflator inflation); this will have consequences, and implications, for RBI policy. However, you will not find interest rate cuts news in most of the writings of foreign and domestic investment banks.

In India, we only talk about how the GDP deflator is negative, how very unusually nominal GDP growth is lower than real growth, how GDP growth is actually very low, and how it feels like 5% growth. But there is no mention at all that policy interest rates need to be reduced. Why? Because, didn’t you know, wholesale prices were “contaminating” consumer prices and making the deflator artificially negative. Hence, the conclusion that consumer inflation in India  is quite high, and likely to go up further, and RBI definitely has no room to cut policy rates any further.

If you peruse through their writings you will find that the “experts” point to, and fret about, the following: Whether the fiscal deficit will be contained at 3.9 %, whether GDP growth rate is correctly measured (“no, it isn’t” says the chorus, co-incidentally composed of a disproportionate number of those aligned with the Congress opposition), and why any interest rate cuts by RBI should be delayed because pulse inflation is so high. Further, remember that RBI anticipated this high inflation and therefore frontloaded interest rate cuts! Is there any basis to this stream of consciousness?

What are the facts? RBI policy repo rate is now at 6.75 %; the personal consumption deflator in the national accounts (not biased by wholesale prices) was at a 1.4 %-y-o-y record low during June-September 2015. Yet, there is no room for RBI to cut rates because pulses, which account for 2.4% of total consumption, suggest that inflation is too high.
In any case, our experts argue, cutting interest rates is like pushing on a string—or beating a dead horse. You know, corporates are not investing because their capacity utilisation is too low. They are not investing because they have too many bad loans, stressed assets, etc. Arrey bhai, what can one do for stressed assets, and lack of demand (low capacity utilisation) and declining prices, and low animal spirits? One can cut interest rates, that’s what.

And RBI governor Raghuram Rajan is right in goading, and cajoling the banks to follow suit in transmitting lower interest rates to consumers. Many of the leaders of these banks (intellectual and otherwise) are still caught in the old trap that savings are a function of deposit rates—and we need to keep nominal rates high in order to attract deposits into the banking system. Jaago, bhai, jaago—duniya badal gayi hai.

While on the subject of exorbitant real rates in our economy, here is something for RBI to chew on, and pursue. It should look at the interest rates credit card companies (banks) charge, sorry overcharge. Even the worst money-lending shark in the world does not charge as much as what credit card companies in India are legally allowed by the ‘sleeping at the wheel’ by regulator RBI. Look at your credit card bill—on any unpaid balance, the interest rate is (around) 46%. Most places in the world the credit card lender rate is 18% or below; nowhere that I know of (other than hyper-inflating Zimbabwe) is the card-lender rate as high as India. Time for RBI to also wake up (jaago) to this non-transmission.

The author is contributing editor, The Financial Express, and senior India analyst, The Observatory Group, a New York-based policy advisory group

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