Monetary policy should focus on growth with employment: DCB

There needs to be clear long-term strategy on monetary policy, says Nasser Munjee, Chairman, DCB. He is of the opinion that RBI needs to ease monetary policy and focus on growth instead of trying to tame inflation. Growth with employment is the need of the hour. "Unemployment caused by our present monetary policy in the last 18 months is horrendous and the word unemployment doesn’t even appear in the discussions that we are having," he says.

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On policy action, he says government action over the past few days has in fact affected confidence. Import curbs and capping individual investments abroad is not helping the case with overseas investor confidence, which in turn is leading to capital outflows. Below is the verbatim transcript of Nasser Munjee's interview on CNBC-TV18 Q: What is your sense of what the Reserve Bank of India (RBI) has done overnight and whether it is a patch or it fixes anything medium-term?
A: It is a patch. I think now they are in a tactical space trying to manage the situation. However, there needs to be clear long-term strategy on monetary policy and my views have been very clear that we have got to now ease monetary policy. We have had negative liquidity in the system even in the last month negative liquidity now 130,000 crore in the system and rates have gone up across the board and this is absolutely disastrous for the Indian economy.
We need desperately to spur growth and monetary policy targeting has to now be growth in employment. The unemployment caused by our present monetary policy in the last 18 months is horrendous and the word unemployment doesn’t even appear in the discussions that we are having. Inflation targeting by monetary policy today is totally inappropriate because aggregate demand is on its way down and the sense we need to be focusing on boosting aggregate demand. Q: Employment gets such a lot of press in the US, much bigger economy than ours but we never even talk about it. Do you think it is coming to a point where the number of new jobless people which are coming to the fore every year may make the case for a demographic discount in India rather than a demographic dividend as we spoke about earlier?
A: Absolutely, in fact a lot of the factories today in India. I am seeing this in corporate India, a large, about 50 percent of their labour force now is contract labour and a lot of contract labour are just rendered unemployed as the slowdown has beaten the economy, a lot of the factories are operating two-three days a week, some are working one shift rather than three shifts. I think we have just lost the ball on employment. That also affects aggregate demand because as people get unemployed or they are scared of losing their jobs, they are not going to spend money and we are seeing a huge decline in aggregate demand in the Indian economy and that is the fundamental cause of the loss of confidence in the economy and in its policy paradigms. Q: Switching to banking, do you think the RBI will do what you are suggesting or do you think its priorities would still be the currency and inflation and growth may continue to be a casualty given the pace at which the currency has been depreciating?
A: I have said on your programme, for years now, 18 months I predicted what would happen as a result of the monetary policy that we are following today and it has come true. The point is that inflation is not a monetary phenomenon at the present moment; it is not an excess aggregate demand over aggregate supply. It is quite the reverse. So, in a sense monetary policy should not be targeting inflation because it will have no impact on inflation. The inflation we are seeing today is relative price inflation, not monetary inflation. So, in a sense we should drop the inflation target from monetary policy, look at the structural issues for inflation and target monetary policy for growth. Q: How do you see banks doing in a situation like this because the way growth has been shaping up, today we are talking about mark to market losses, which is not such a big core fundamental problem. The core is what happens to credit growth and what happens to asset quality. Do you see significant damage on both those fronts because the market has been trying to price that in over the last two months?
A: Absolutely. We are a small bank but what we are seeing is even the small and medium enterprises (SME) sector, the micro SME and the SME sector are badly affected as the big boys get affected and in the sense while the business models are sound, the cash flow problems are becoming very acute as demand starts to falloff. The only silver lining would be those industries that are exporting. What I am seeing now is that with this devaluation, India has now become very advantageous in terms of sourcing world class products out of India at least the big firms that are producing on that scale and we are seeing export orders now start to almost immediately respond. Q: The kind of policy response we have been seeing for the last few weeks because that has also lead to some disappointment in the world that we are trying to crimp imports, we are trying things like Indian companies should not be investing overseas or Indian individuals should not be buying overseas. Do you agree with this kind of recipe to deal with the problem that we are facing?
A: Absolutely not. This is what I call the soviet type policy making. This little tinkering around with elements that affect confidence in the Indian economy and confidence in policy making in India and I think what we have lost on the international plain, I was talking to investors all over the world in June. There is a lot of confidence issue on lack of appropriate policies, we are not appropriately addressing the problems we are facing in India and in a sense we are not even publicly recognizing that.
Once we recognize the problem we can deal with it and the key to solving our present problems is capital inflows, you are not going to make any dent on current account deficit overnight. What you can do is mitigate that through capital inflows, everything we are seeing today is capital outflows as people selloff in the domestic markets, you are not seeing foreign direct investment (FDI), you are not seeing investors at all confident about investing in India for the next year or two. We need to reverse that. The question is how we reverse it. We can only reverse it if we can demonstrate that we have appropriate policies to address the problems and for that we should recognize that we have those problems.