Better late

Had Raghuram Rajan not done what he had to do, the central bank would have faced a crisis of confidence

By Mohan Sule

Has India’s financial markets got its version of James Bond when the Reserve Bank of India boss announced, “I am Raghuram Rajan and do what I have to”, and slashed the lending rate by 50 basis points (bps) late September? Finally, it appeared, the governor had come on board of the finance minister’s mission of aiming for growth. Investors, fed on a near zero-calorie diet by US Feral Reserve’s previous governor Ben Bernanke, however, did not appear impressed. Equities closed the day with just 0.63% gain. The clue was in plain sight: the market had discounted a benevolent money regime in spite of Rajan resisting a rate reduction for nearly a quarter since his last adventure and springing a surprise with a cut that was 25 bps more than expected. He waited for Fed chair Janet Yellen to reveal her cards (making jokers of pundits predicting her to start the cycle of rate increases from September), for the southwest monsoon to end and threats from maverick politicians to convince himself that the virtue of cautiousness could become a crisis of confidence in the central bank. That India might have been saved from tipping into recession is borne by the fact that the RBI has downgraded the growth and inflation targets for the current fiscal by 0.2% points. The downward revision indicates slump in demand going ahead despite softer rates.

Against the backdrop of the ex-US developed regions undertaking liquidity injection to boost inflation, a vital indicator of growth, the governor’s focus on controlling inflation would have been viewed indulgently if the domestic economy was sprinting. India’s projected expansion for the current year is notable considering China’s slowdown but tepid if not for the lower base of the past years. A deficient monsoon last year and moderate increase in the purchase price of crops have tamed food inflation, which contributed just 0.41% to headline inflation in April-July as against 2% a year ago. The change in the peg for the base rate to the consumer price index (with more food items) has raised the bar for policy action. WPI-based inflation dipped further and continued to be in the negative zone for the 10th straight month and the all-India general CPI inflation was nearly flat in August. The last lending rate cut of 25 bps had not pushed up inflation but was not having the desired salutary effect on manufacturing either. The cumulative output of eight core industries was down to 2.2% in April to August 2015 from 5.6% growth a year ago. Accounting for the overall CPI in August, the real rate of interest at 3.50% was too high for a listless economy. Viewed against the negative WPI inflation, it should have been near zero. The flight of foreign capital in anticipation of the hike in Fed rates in September 2015 hit a two-year high in August. Yet it is likely that the outflow will taper going ahead as a strong dollar has been largely factored by the market.

The third reason was the improvement in India’s macro picture but for the wrong reasons. The balance of payments surplus rose slightly in the June 2015 quarter from a year ago but had eased from the previous quarter. The current account deficit was down to 1.2% of GDP from 1.6% in the June 2014 quarter but had increased from 0.2% in the March 2015 quarter. Low commodity prices were improving the government’s balance sheet but not booting up industrial activity significantly. Due to higher domestic interest rates, external debt rose1.8% end June 2015 over end March 2015 as outstanding NRI deposits more than doubled from a year ago and low-cost overseas commercial borrowings increased. The volatile financial markets resulted in spurt in demand deposits in the current fiscal till early August as against a slide a year ago. The fourth factor was the government’s performance. Credit is up slightly so far in the fiscal. GDP expanded 7% in the June 2015 quarter, higher than the 6.7% growth inherited by Modi. Importantly, the uptick has come despite low inflation. Exports continue to be down but seemed to have bottomed out as the pace of the decline was the lowest in eight months in July. Fiscal deficit at 8.84% of GDP in the June 2015 quarter from 9.99% a year ago was due to the success of PSU divestment, auction of natural resources and control over subsidies. Total receipts were up 20.59% in the quarter over a year ago. Against this backdrop, the RBI could no longer pass on the task of accelerating growth to the government. The fifth reason was China’s depreciation of the yuan to spur its slowing economy. The rupee had to weaken in relation to stay competitive in international markets. The window of opportunity would be available till December, when the Fed is said to finally embark on boosting interest rates in small doses. As such, Rajan had to do what he did without much ado.

The guest list

Instead of meeting captains of industry, the prime minister should have heard from some ground-level troops to fix the economy

By Mohan Sule

The ritual of the policy makers from prime minister downwards meeting corporate bosses every time the economy goes into a tailspin is familiar and frustrating. The conclusions drawn from the few hours of interaction with the who’s who of the government are also predictable. The ministers kick the ball into the businessmen’s court. The manufacturers and financiers plead for more fiscal and monetary sops. It is puzzling why Prime Minister Narendra Modi, who rode to power promising a break from the past, should carry on with this legacy of a thoroughly discredited regime. Though there was a sprinkling of public sector presence, the gathering was dominated by big private sector players. Many of them could have been the poster boys of crony capitalism, enriching themselves by cornering lucrative commodity prospecting rights. One is allegedly involved in the coal block allotment scam and another blamed by the government of under-performing to get higher prices for the output. A banker is grappling with mounting bad loans due to interference from power brokers and so also a peer because of aggressively chasing market share. Another emerging industry czar with political ties is believed to have under-reported revenues to avoid levies. The head of a diversified conglomerate makes a toxic product as well as a food item that is of late under the scanner of the regulator.

The old guard of India Inc is known to get policies tailored to protect them from competition, out-of-turn favors and easy access to the PMO and the finance ministry. It is used to bagging licenses not for any skill set but because of the proximity to the movers and shakers in the capital. Loans were obtained without adequate collateral and risk assessment following phone calls from bureaucrats, secure in the knowledge that any execution risk will be taken care of by visiting the relevant ministers. Auctioning of natural resources, instructions to banks to give credit based on commercial viability, cracking down on makers of spurious products and directing influential visitors to the concerned officials instead of the finance or prime minister have not helped the Modi government in winning any popularity sweepstakes with Corporate India. In fact, a patriarch got miffed because his fund-raising proposal did not get any preferential treatment. Many are heard grumbling, anonymously, in the media of not getting to meet the prime minister to sound him out on troubling issues specific to their projects. After operating in such a comfort zone, no wonder industry is muttering about cheap Chinese imports and sluggish rural market. The subtle message is that the government should continue routing doles through the Mahatma Gandhi National Rural Employment Guarantee scheme and increase the minimum support price for crops to bring prosperity to the hinterland, hurt by poor monsoon, to lift sales instead of declaring that it is ready to set up factories to provide jobs to the next generation of those farmers willing to give up their land for a stake in future prosperity.

What should the prime minister have done instead? Often he has professed his belief that it is the medium- and small-scale units that drive employment in India. To test his proposition, he should have invited tier 2 and tier 3 entrepreneurs. For example, the boss of the newest private sector bank and a new-age insurer could have elaborated on the potential of financial services to marry technology and human resources. The founder of a corporate healthcare chain could have focused on the paucity of skilled workers including doctors, support staff and lab technicians. A publisher of educational tools would have been a symbol of the parallel system that is catering to thousands of students outside the mainstream. One of the MPs from the prime minister’s own party could have revealed the potential of the entertainment industry as a revenue generator as well as a magnet for employment in front and back of camera. The potential of processed food, as any of the promoters graduating from the unorganized sector to builders of brand for the domestic and export markets would have told, still remains to be tapped. A food supermarket entrepreneur would have been appropriate to note the linkages between better prices for farmers, cheaper products for consumers and training of unskilled labor. A budget hotelier would have reminded that domestic tourism, too, is a crucial contributor to the GDP. A first-generation airline owner could have dissected the reasons why a once emerging sector had gone out of favor with investors and how it is a supplier of jobs ranging from flight service to maintenance engineers. To win the war against poverty and unemployment, there is need for foot soldiers rather than generals.