Is the Helicopter airborne in India?

It’s difficult to segregate economic thinking from politico-social objectives.

In India, though the macro numbers seem to provide comfort, liquidity continues to remain an issue.
In India, though the macro numbers seem to provide comfort, liquidity continues to remain an issue.

By Sharad Kumar

No sooner the world looks to be settling down, the tranquillity stands trumped by politico-economic statements of sorts. That is what the people far west and far east are experiencing. The trade war between China and the US has been a zigzag puzzle with financial markets and global trade bearing the brunt of these decisions. This, at times, raises a scare of moving towards ‘protectionism’. A quick movement of funds across nations as a response to this global instability leaves a cascading impact on economies that are the frontrunners in the race to development, including India.

We realise the economies across the world pass through business cycles and require support by an active fiscal and monetary policy mechanism, thereby justifying both Keynesian theory of government intervention as well as Friedman’s monetarist viewpoint.

A corollary of this effective economic dynamism can also be seen in the sudden change in stance in the US, indicating a pause or reversal on the otherwise continuing Fed rate hikes. While the current economic milieu has turned too dynamic, rather confusing by mixed statements and global rhetoric, the Indian economy reels through its own set of issues, which hold semblance with many counterparts on the other side of the globe. Global liquidity has been one of the vibrant issues that has again taken centre stage, and with interest rates at relatively lower end of the curve, there is little room for manipulating the same. However, ways and means, traditional as well as new structured ones, are being devised to handle this.

Economists are largely known to coin unorthodox nomenclature for financial and economic events and situations taking place in a not so complex but integrated network of financial system. The colloquy on quantitative easing across the globe as well as in Indian economy reminds one of ‘Helicopter Money’, an interesting terminology coined by monetarist Milton Friedman way back in 1969. One does not know whether it would be right to use it in the current situation, but the ex-Fed Chairman Ben Bernanke’s advocation of the same in 2002, and having a reference of the same later in his biography ‘The Courage to Act’, gives courage to use this in the current situation.

India has been grappling with the issue of liquidity. The announcement of increasing the exemption limit for GST and a probable reduction in the GST rates in FY19 and the series of OMOs done by the central bank draw parallel to the situation, which led Bernanke to recall Friedman’s ‘Helicopter Money’ in 2002, suggesting a broad-based tax cut accommodated by a programme of open-market purchases.

In India, though the macro numbers seem to provide comfort, liquidity continues to remain an issue. The Indian economy is facing liquidity problems of a different nature, wherein it is needed to bring comfort to banks and the financial sector. The QE in other countries was done with the objective of reviving those economies out of a cycle of depression. In India, the growth numbers are still good and are not yet a major concern, but the regulator’s intent is to provide liquidity to the banking system, which is passing through a paradox of lower deposits and higher credit growth. The CD ratio of the banking system indicates liquidity pressure on banks, which, in due course, may stall the growth by restricting credit availability, especially when the credit flow from the NBFC segment faces immense problems.

RBI is committed upon its twin objectives of managing the short-term liquidity and supplying the long-term durable liquidity in the system. However, as against the past decade, where RBI’s liquidity comfort zone was +/-1% of NDTL, RBI now prefers to have a neutral stance.

The economy is in the midst of first quarter, where credit drawdowns are relatively less (the reason why the CD ratio has eased). Although the deposit growth has reached double-digit levels, it is not enough to meet the credit demand, which may see pick-up once the election process is over. RBI managed the long-term liquidity issues by OMOs (announced even now in May 2019) and bought securities worth Rs 2,985 billion in FY19 to give comfort to the liquidity conditions of the economy. This, however, may not compensate the escalating liquidity requirements, which have breached the erstwhile comfort zone of RBI on numerous occasions in the month of December 2018 and other occasions too. RBI was expected to come out with other options to improve the liquidity and thus came the forex swap announcement, by which RBI has mopped up $5 billion in two tranches, on March 26 and April 23, pushing in around Rs 70,000 crore of liquidity in the system.

An equilibrium can be achieved with an efficient mix of fiscal and monetary policy. It is quite difficult to keep economic thinking segregated from politico-social objectives. The announcement of income support scheme Pradhan Mantri Kisan Samman Nidhi, or other similar schemes, points towards such objectives. Although from a social perspective the benefits of the scheme deserve applause, a solution with sustained benefit to the farm community is a better option. This could be by way of an effective marketing mechanism, removal of intermediaries in the agri-marketing process, development of warehouse facilities and giving easy access to farmers. But we believe these solutions would also be coming up in the near term.

It leads to a rather intriguing economic situation, where on the one hand the banking system facing liquidity shortfall is being supported by the regulator adding up systemic liquidity, while politico-economic situation stares towards announcements such as those of tax cuts, farm loan waivers, income support or other ways of providing benefits, which are like double-edged sword, denting the already precarious fiscal situation on one hand and impacting the credit culture on the other.

The accompanying graph gives an idea about the farm loan waiver announced in past few years. Even if no fresh guesswork is done for these farm loan waivers and income support, it would be enough to disturb fiscal arithmetic of the government. It may also be recalled that the debt waiver announcement of 2008 had little impact on the growth but took the fiscal deficit to unsustainable levels as against FRBMA, which in its original form aimed at reducing fiscal deficit to 3% of GDP by 2008.

The elections usually lead to opening of floodgates. If not timely checked, these can lead to doling out of benefits, which though short-term in nature may leave a longer impact on the fiscal discipline of the economy, without accruing a sustained benefit and permanent solution to issues such as farm distress.

While on the monetary front RBI is fulfilling the task of providing liquidity as well as the banker of last resort, the fiscal initiatives are to be keenly watched. It is by no measures that the government can avoid these situations in a democratic set-up, but the skills of think tanks will come for a test as to how they create a balance between revenue and expenses in this situation and emerge successful, without compromising ‘much’ on fiscal discipline.

(The author is AGM-Economist, SBI. Views are personal)

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