Concurring with the view that the economic slowdown was cyclical, the recent Reserve Bank of India analysis called the three-quarter slide a down phase, but not a trend reversal
It has been a mixed two months since the first Budget of the second term of the NDA government. The Budget took a stern view in terms of taxation of the super rich. It pleased markets by committing the government to borrow abroad. But, it was churlish in putting shackles on FDI.
The economy had been losing growth momentum since the last quarter of 2018. In the first quarter of 2019 (the last quarter of FY19), GDP growth came in at 5.8% , far below the 7%+ rhythm of the previous four years. I took the view, then, that the slowdown was cyclical due to uncertainty and the collapse of confidence in the non-banking lending sector.
What was needed, I thought, was not temporary boost to demand, but a strategy for long-run growth. The Reserve Bank of India has just come out with its analysis, which called the three-quarter slide as the down phase of a cycle, but not a trend reversal. On Friday afternoon, the numbers for the second quarter of Calendar 2019 (first quarter of FY20) have come in at 5%.
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The government has been showing awareness that its budget may have given wrong signals. I blamed the confused message of the Budget on the anti-growth and anti-foreign capital ideologues in the majority party. These elements seem to have been checked and Nirmala Sitharaman has been issuing announcements which are like supplementary Budget addenda. This may be the best way for a new finance minister, feeling her way into the demanding job following Arun Jaitley, who had a remarkable control over economic policy with the enthusiastic support of the prime minister.
This has been just one of the shocks of the week . Earlier on in the week, the news was confirmed that RBI will be able to transfer Rs 1.76 trillion (around $250 million) from its dividend income as well as by drawing down on its reserves. Late last year, there had been an open argument between the central bank hierarchy and the finance ministry about what the latter thought was excessive prudence on the part of RBI. The capital ratio of RBI was thought to be way above what was needed by Delhi while its own technical experts thought otherwise. The Governor, Urjit Patel, and his Deputy, Viral Acharya, both discreetly departed.
The Bimal Jalan Committee reported earlier this week and recommended that the ratio could be reduced safely. RBI thereupon announced the transfer, which will ease the fiscal pressure on the government. This has raised questions about the independence of the central bank. The idea that central bank should be independent of the elected Executive seems to have become a religious dogma. But, it is a fairly recent development. UK conferred independence on the Bank of England only upon the arrival of Gordon Brown as the new Chancellor in 1997, and only with respect to setting the interest rate.
India has never had such a tradition, and the 1935 legislation setting up RBI clearly enjoins it to follow Treasury advice. Governors were appointed from the cadre of retiring finance secretaries, and they carried out the task of walking the line faithfully. It was globalisation and vaulting ambition which led the Manmohan Singh government to invite a distinguished academic, Dr Raghuram Rajan, to be the Governor, signalling India’s coming into the big league of economic powers. Rajan took independence as obvious, but quit halfway through his second term, when the elected government had changed colour. His successor, Dr Urjit Patel, a Yale alumnus also took independence as prudent.
The masters in Delhi disagreed, and Dr Patel politely made his excuse and resigned. The situation is back to normal, and Shaktikanta Das, the new Governor, has been very active in bringing down the interest rate while keeping inflation on its downward path. The cooperative attitude will continue. The test is now of the fiscal authorities in Delhi, as to how they will use the gift from RBI. It would make sense if the money was used to recapitalise the nationalised banks preparatory, hopefully, to their sale. The government could also use the windfall for retiring debt, which would cheer the bond markets.
What is now needed is a clear signal from the PM himself that his commitment to sustained and sustainable growth over the medium term has not changed. From the recent statement by the aviation minister, we know that the government intends to privatise Air India. A more comprehensive strategy to dump unprofitable and inefficient public sector enterprises would change the image of India abroad from a reluctant half-hearted commitment to becoming a middle income level economy in the second quarter of the twenty first century, taking on rivals and winning. India can, and must do it. The way Modi has got the world used to learning about India is by announcing the strategy himself. Modi 2.0 has to be like Modi 1.0 just bigger and better.
The author is a Prominent economist and labour peer
Views are personal