RBI message to Raisina Hill. Spend!
Uday Kotak is normally not given to rash hyperbole. This week, the chief of Kotak Bank and president of the CII, set the cat among the faint hearted by advocating printing of notes by the RBI to stimulate the economy. The Keynesian approach was set in Keynesian articulation. "Words", John Maynard Keynes famously said, "ought to be a little wild, for they are the assault of thoughts upon the unthinking".
Circumstance is often an eloquent expression of the imperative for action. Perceived potential of double-digit growth has yielded to a veiled sense of foreboding. The extension of lockdowns has triggered despondency. The despair of the living about livelihood is palpable, particularly among those in the lower income tiers.
On Thursday, the RBI released its annual essay. In classic textbook approach, the central message was not in the theme song but in a highlighted box. The opening sentence wrapped in academic verbiage stated: "For a self-sustaining GDP growth trajectory post-COVID-19, a durable revival in private consumption and investment demand together would be critical as they account for around 85 per cent of GDP."
Keynes may well be the unseen presence but central bankers rarely leverage their privilege to explicitly state the obvious. The chosen code is implicit messaging. Reserve Bank of India Governor Shaktikanta Das, whose signature style is understated expression, adheres by the rule of shunning rhetoric.
The message in the algebraic flow of the equation though is vividly clear. Falling incomes impact consumption, lower consumption will retard/retrench investment and growth will suffer without the duet of consumption and investment. The focus of state finance ministers on dents in collections at the GST Council meeting, highlights the cause for concern. The weekly data released by the RBI has definitive indicators of the level of distress. Credit to business, described as non-food credit, grew by barely 5.7 per cent in 2020-21 and has barely moved since. The retrenchment of demand has much to do with the uncertainty of income generation. Faced with lack of funds, small and medium enterprises plan to shed jobs and curtail output and, banks, unsurprisingly, have sought moratorium and extension of restructuring for borrowers.
The timing of RBI’s report is noteworthy – coming as it does following the transfer of the bonanza of Rs 99,000 crore to the government, in the run-up to the release of the GDP growth data this week and before the June 4 bi-monthly monetary policy meeting. In its 83-page assessment of the economy, the RBI has cited data and recited verse to point out all that it has done to prop up growth and the economy – the accommodative stance, the market interventions, the moratorium on repayments, the subsidising of forward cover, and the management of exchange rates to shield trade and more.
The RBI has signalled that monetary policy is approaching the boundary of limitations. Already, the ugly head of inflation is raising its head - thanks in part to rising input prices, supply chain disruptions and fuel prices aggravated by taxation. And then, there is the 'what will happen to US inflation and interest rates' conundrum. The challenge of a possible taper tantrum has implications for flows into the debt and equity markets, for inflation, interest rates and the value of the rupee per dollar.
Ergo the RBI chose to tell Raisina Hill to read the lips - i.e. spend! Even if it is couched in verbose paragraphs, the message essentially is that the ball is now in the forecourt of the government. Indeed, through instructive data it has presented the scope for fiscal policy intervention - for instance, India is 14th among G20 nations trailing Brazil, Korea, South Africa in fiscal support measures and is 10th in the measure of gross debt to GDP ratio.
The good news is that exports, buoyed by global demand, is up and the organised sector has so far managed to work with the Covid appropriate protocol to keep production going. The question, therefore, comes back to falling demand in the domestic economy - and this is validated by 'uncertainty' factor expressed in forward guidance issued by companies.
On Friday, the Ministry of Home Affairs extended the umbrella provisions of pandemic management till the end of June. States such as Maharashtra, Karnataka, Tamil Nadu and others have already indicated intent to restrict economic engagement. Arguably, the expectation of economic normalcy is now pushed beyond the April-June quarter. And, there is yet the spectre of the third wave to reckon with.
The case for intervention to protect incomes and prevent individual and institutional scarring across the economy is indisputable. There is no dearth of ideas and literature on what needs to be done – whether it is cash transfers as was done during the first wave, enhanced allocation for rural employment.
Yes, there is the fear of the impact of rising government expenditure on the monetary conditions and on fiscal deficit. This calls for out of the box measures in expenditure management as also monetisation of public assets to fund revival and sustain growth. It is instructive to remember that given the shock that the second wave has delivered across geographies, the cost of not doing anything will possibly be greater than the cost of doing something.
(The writer is author of 'The Gated Republic', 'Aadhaar:A Biometric History of India’s 12 Digit Revolution', and 'Accidental India' and can be reached at shankkar.aiyar@gmail.com)