Subir Roy
Looking at the current Indian scene, we are reminded of a sarcasm that is hurled by British politicians at one who did not deliver despite starting off under the most propitious signs: "He snatched defeat from the jaws of victory". The following spells out the Indian relevance.
Two developments in the last few days constitute a serious setback for the Bharatiya Janata Party(BJP)-led National Democratic Alliance (NDA) government. One is the abrupt resignation of Reserve Bank of India (RBI) Governor Urjit Patel and the other is the all-round poor showing by the BJP in the assembly elections. Since the same BJP is in power at the Centre, the assembly results are being interpreted as a verdict on the performance of the central government too.
Many explanations will be given for the assembly poll results, some of them contradictory, but there will be near unanimity that the departure of the central bank governor is a self-inflicted wound which the ruling formation should have avoided, both for its own sake and for that of the economy.
Patel, who appears to have had no option but to resign, was fighting to retain the autonomy of the central bank in an age when there is a global consensus for an independent authority performing the core function of administering monetary policy to maintain financial stability, both internally and externally. This lays the foundation for market confidence. Without that confidence, investment, both trans-border and domestic, will go out of the window.
With hindsight it seems unbelievable that so much has been expended for so little. The primary difference between the government and the RBI seems to be the latter’s unwillingness to part with some of its reserves, which would have helped the government remain within its own fiscal deficit target. We now have Arvind Subramanian, former chief economic adviser, saying there is a need to be a "little less obsessed with these targets" (like fiscal deficit) and push for an independent fiscal council.
Maintaining fiscal discipline is of course important, but getting into a spat over it so that the governor eventually has to leave is, well, terribly short-sighted. This spat, more than anything else (the matter of liquidity for NBFCs had already been sorted out), led to the government proposing that the RBI be more board-driven — as opposed to the board hitherto being mainly a source of good advice. This the governor could not agree to. When the government can pack the board with directors of its choice (Nachiket Mor goes and S Gurumurthy comes in), it means telling the RBI to fall in line, or else.
The practical implication of this is that with eminent economists (Raghuram Rajan and Subramanian) not being around and both the finance minister and prime minister being non-economists, on a day-to-day basis, it is the senior bureaucrats in the finance ministry with variable economic expertise who will effectively call the shots. It is doubtful if such a situation will be good for the careful running of the central bank or the economy.
As for the assembly election results, they are a severe political setback for the government, but more importantly for the present purpose, they are likely to have a critical impact on economic policy. The foremost issue being discussed is whether the Centre, seeing the way the Telangana Rashtra Samithi won a resounding victory by elaborately laying out goodies, will do the same thing and lay the foundations of a post-election inflationary episode less than half a year from now.
Politicians know best how to interpret election results but it is worth asking whether the overriding mood in the country, for which the government seems to have paid dearly, is not farmers' distress. The great irony is that you cannot solve farmers' agony by simply throwing money at it by deciding to go in for things such as loan waivers. For one, farmers take loans from the informal sector too, i.e. from money lenders.
What farmers need is a decent price at which they can sell their produce. Delivering this is easier said than done by announcing minimum support prices and bonuses to wit. These do not work without comprehensive procurement operations being in place, which is not there. Critically important is to remove market restrictions imposed domestically by the institution of agricultural produce marketing committees (they simply refuse to die) and on exports. The overriding reality is that the prime minister’s promise of doubling farm incomes remains elusive.
The significance of the assembly election results are highlighted when they are posited against the mandate that the BJP received in the 2014 parliamentary elections and the fact that the present polls are a kind of curtain raiser for the parliamentary elections less than six months away. The 2014 elections, which the BJP fought on the platform of promising ‘vikas’ and jobs, gave an unequivocal mandate to it. Vikas has not reached the common man and the promised jobs are elusive.
The economy has, however, continued to grow well, for which the government can take credit. That said, without a feel-good factor at the grassroots (with no help from demonetisation and GST), the benefits of growth seem to have gone to the better off, something that income distribution statistics should bear out. So in a key economic sense, the 2014 mandate seems to have been squandered.
Subir Roy is a senior journalist and author. Views expressed are personal.
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