When the going gets tough, the tough ought to get going. But in India, it’s far more likely that when the going gets tough, the tough will line up outside sarkari officials’ doors and plead for stimulus packages and interest rate cuts – and show themselves up to be not so tough after all.
On Monday, the suited-booted captains of Indian industry (as represented by the three leading chambers of industry), who have had to spread themselves thin between three potential Finance Ministers, pressed their case with C Rangarajan, who heads the Prime Minister’s Economic Advisory Council (PMEAC). At that meeting, CII president Adi Godjrej said later, they advanced the case for interest rate cuts and an “economic revival package” as part of coordinated policy action to arrest the showdown in economic growth rates.
Godrej said there was an ”an urgent need to create conditions for revival of private investment by a reduction in repo (short-term lending) rate by 100 basis points (that is, 1 percentage point), and reduction of Cash Reserve Ratio (CRR) by 100 basis points.” In addition, he said, the government should work out an economic revival package in consultation with the RBI.
Also on Monday, some of India’s top bankers made a similar pitch with the RBI for a rate cut – even though they themselves acknowledge that such a move would only have “symbolic” effect in reviving growth, and could in fact stoke inflation even further.
The economic slowdown has, of course, been harsh on everyone, and it hasn’t helped that a government that has been asleep at the wheel has compounded the economic mess with an orgy of gluttonous and unproductive spending that has stoked inflation at a time when growth rates are falling.
That heightened level of inflation has cramped the space for the RBI to lower rates, even though it has repeatedly articulated its angst over the slowdown. Painful as they are, high interest rates are, as we’d noted here, the bitter medicine that the Good Doctor has administered the economy to work off the hangover from the spending binge.
India’s mounting fiscal deficit, and its bloated subsidy bill, are flashing warning signals to the macroeconomic fundamentals, and need urgent attention, as do supply-side initiatives that unclog the clutter. On top of that, a deficient monsoon is stoking fears of a drought, which will require social spending in rural areas, and has already revived the unsavoury prospect of heightened food inflation.
All these are critical considerations that require a higher governmental priority than heads of industry who, for all their anxieties, aren’t exactly wallowing in misery.
Which is why it’s incredibly self-seeking and borderline irresponsible for chambers of industry to lobby the government to prevail upon the RBI to lower rates – and to ask for a stimulus package for themselves at precisely the time when the more compelling need is to rein in spending and stand by to face the grim prospects of a drought.
It reveals an incapacity on their part to think beyond the short-term fix of ‘cheap money’ and self-serving stimulus packages – even though they ought to know, from the experience of other economies, that such ‘quick fixes’ don’t have any meaningful impact and only end up busting the bank. The same captains of industry have been rightly calling the government to account on the need to rein in spending; for them to now ask for a stimulus package for themselves betrays a borderline hypocritical frame of mind.
Mercifully, Rangarajan, who knew what was coming from the industry representatives, pre-emptively rejected their demands. Barely hours earlier on Monday, he noted that the compelling need to contain the fiscal deficit at the budgeted levels ruled out the possibility of another stimulus on the lines that the government offered in 2008.
“We have to make an effort to contain fiscal deficit at the budgeted level,” Rangarajan said. “That itself is a very big task. Therefore, we need to look at government expenditure.”
Rangarajan also effectively deflected the demand for a rate cut by noting that the RBI would find it difficult to cut rates if inflation still remained high. ”If the inflation rate, particularly non-food manufacturing, shows decline, then there will be scope for RBI to adopt easier stance,” he noted.
Harsh as it may sound, those are precisely the correct policy responses that today’s economic situation warrants. And if a drought compounds these problems, the government will have an even tougher job of keeping growth rates up, inflation levels down, and its subsidies and deficits down to reasonable levels.
At such a moment, the demand from industry leaders, who are at the top of the food chain, for stimulus packages and lower interest rates is borderline reckless. These times are, of course, just as tough for them as they are for others; and the are, of course, right to press the government for process reforms that make it easier to them to secure approvals and stimulate investments. But by queuing up outside sarkari doors and seeking meaningless “quick-fixes”, they are showing up themselves to be less than sterling enterpreneurs.
Manmohan Singh has spoken of unleashing the animal spirits of the industry; queuing up for handouts in the way that these leaders are is not exactly reflective of the right kind of “animal spirits”. They are letting themselves and the country down with their self-seeking ways.