By Swapan Dasgupta
Last Tuesday’s bi-monthly monetary policy review by the Reserve Bank of India was—by the stodgy standards of Central Banks—a little unusual: it was preceded by competitive proclamations.
Finance Minister Arun Jaitley went public barely two days before the announcement pressing the RBI to bring down interest rates, now that inflation had fallen to a more benign level. India’s industry bodies that stressed the need to give manufacturing a boost by lowering the cost of money backed him vocally. RBI Governor Raghuram Rajan didn’t personally jump into the debate with the Ministry of Finance and the business community. However, there was an unmistakable impression in Mumbai’s financial community that a clutch of economists linked to foreign financial institutions were engaged in a proxy battle against the government on behalf of the Governor. A portrait of Rajan as the custodian of India’s long-term interests battling against neo-literate politicians and moneybags was disingenuously painted.
There is absolutely nothing to suggest that Rajan was in any way connected to this counter-offensive by fellow economists who, in any case, were also concerned with appropriate strategies to bolster India’s credentials as a growth centre. Indeed, the Governor was very measured in replying to media queries about the Finance Minister’s plea for a cut in interest rates: “We are very respectful of the views of the government and we try and accommodate these views to the extent we can…We are not combatants; we are on the same side.” However, this tact wasn’t always on display by those who saw the RBI’s decision to defer a rate cut till 2015 as a turf war. Take the comments of Per Hammarlund, chief emerging markets strategist at Skandinaviska Enskilda Banken AB. According to this Swedish banker (as quoted in Mint) “Since Rajan became head of RBI, we see the central bank independence increasing… (and) he’s one of the few now definitely in a position where he can speak out more forcefully against the government.”
Whether speaking out “forcefully against the government” is part of the RBI Governor’s job description seems contentious. No doubt there are those in the political arena who would love to witness an ugly clash between the Narendra Modi government and the RBI Governor who was appointed by the earlier regime. For the moment, however, neither side is rising to the bait. From the government’s perspective, the RBI decision to put off rate cuts till early-2015 is disappointing but not catastrophic. The RBI has proclaimed its commitment to a low interest economy, which is encouraging. At the same time, the sharp fall in global oil prices has given the government sufficient elbow room to cater to its election promise of bringing down inflation. For a party that banks quite heavily on its middle and aspirational class supporters, the sharp fall in the retail prices of diesel, petrol and cooking gas has been a great bonanza, especially with three state Assembly elections underway. In hindsight, Jaitley may well savour the impact of a 100 bps cut in January or March, around the time of the Union Budget, rather than the nominal 25 bps reduction that may have resulted from any announcement last Tuesday.
Overall, the Modi government has been extremely lucky in a number of ways. About six weeks ago, it seemed that that the GDP growth for the quarter would at best touch five per cent—a fall from the 5.7 per cent growth registered in the previous quarter. That the final figure was 5.3 per cent suggests that, despite the unending sluggishness of Indian agriculture, there has been a marked improvement in the fortunes of the services sector. As things stand, India seems decently poised to cross six per cent annual growth by the time the Modi regime celebrates one year in power.
For the government, however, the GDP figures are a small consolation. In the summer of 2014, Modi received a resounding mandate on two counts: to bring decisiveness and coherence into the government and to bring about a discernable improvement in the quality of life of people. There may have been other factors but those were subsidiary to the main thrust of popular expectations. In particular, Modi was aware that the enthusiasm of the 18 to 35-year age group for him was centred on expectation of opportunities. With approximately one million new entrants into the job market each month, Modi cannot afford jobless growth. It is this silent but massive political pressure on the government that may explain why Jaitley can ill afford to share Rajan’s preoccupation with the long-term. Politicians need to deliver results fast, before disappointment sets in.
After six months in power, the economic thrust of the Modi government can be very clearly discerned. It comprises two central (and interlinked) objectives. First, the government is seeking to dramatically improve the ease of doing business in India. Apart from reducing the procedural complications that accompany business, there is an emphasis on simplifying taxation and removing statutory obstacles in the path of entrepreneurship. The recent changes in labour legislation have made life easier for small entrepreneurs.
Secondly, Modi’s “Make in India” mantra is geared exclusively towards domestic job creation. Reviving manufacturing is obviously at the heart of the exercise, but it extends to all other sectors that have the potential of generating employment. The easing of visa norms for visitors to India wasn’t, for example, only a ruse to draw cheers from Overseas Indians in New York and Sydney. It is inextricably linked to adding to India’s inward flow of overseas visitors that, in turn, creates large numbers of jobs in the services sector. Likewise, the new Defence Minister Manohar Parrikar has been entrusted with the lofty mission of creating a manufacturing base for armaments and ancillaries within India.
For the moment, both industry and the markets have responded to the government’s economic thrust quite exuberantly. If the stock market graph and future projections are any guide, India is beginning to think big and attempting to make up for lost time. However, after six months, there is one major problem: the mood of optimism, indeed over-optimism, has yet to be felt on the ground. In Mumbai, for example, there is a nagging concern that capital expenditure of corporates (both indigenous and foreign) remains below expectations. In plain terms this means that capital is still adopting a wait-and-watch attitude.
It is entirely possible that two major initiatives can change the mood dramatically. The first is the proposed changes to the Land Acquisition Act that Jaitley has often spoken about. The second is the expectation that the much-delayed Goods and Services Tax will be enacted and made operational by April 1, 2016. Yet, both these measures face political obstacles, not least of which is the government’s numerical deficit in the Rajya Sabha. The BJP and its allies will be in a legislative comfort zone by mid-2016. But 18 months is too long a time to persist with modest incremental reforms. The present political support for the Prime Minister could turn into exasperation if there isn’t evidence of forward movement in the next 18 months.
What the government needs at this juncture is one big bang announcement of a landmark project, preferably in the manufacturing sector. It was the shifting of the Nano plant of Tata Motors to Gujarat in 2008 that proved a game-changer for the then Chief Minister Modi. He needs something equally big and dramatic in the next two or three months to demonstrate that the groundwork is beginning to yield returns. That is why the government can ill afford the patience of the long term.
The Telegraph, December 5, 2014