Global Economy

View: FM needs to restore RBI’s independence, and sternly balance her Budget

By Ashok V Desai

It is all in the past. Nirmala Sitharaman is no longer a rookie finance minister. She has left her maiden Budget far behind, and if she chooses to speak longer this year than last, she may face the risk of snores disturbing her speech.

Mea culpa is understandable after the first Budget, and reversal of errors must not be blamed. Corporation tax has to be paid only by profitable companies. But at a time when they cannot even pay interest, let alone repay loans, some generosity was well advised. Sitharaman did not see that corporations are not human, and do not deserve progressive taxation that is normal for personal taxpayers.

Her fiddling with customs duties was uncalled for. But now that Trump the Great has followed in her footsteps, she may not see her missteps. The biggest change in the half-year since she presented her first Budget is in the state of the economy. The Indian economy has, for long, been in the habit of growing faster than other major economies — except China.

So, variations in growth did not register. But this time, the inexorable fall in its growth rate, from 8% to 4.5% in five quarters, cannot be ignored. It is not just the growth rate. One balance sheet after another has turned sick. For years, we thought it was just two: the balance sheets of banks, and of the companies that borrowed from them to build infrastructure.

Now, former chief economic adviser Arvind Subramanian and former head of India’s International Monetary Fund (IMF) office Josh Felman in their December 2019 paper, ‘India’s Great Slowdown: What Happened? What’s the Way Out?’, say that two more have tumbled: small and medium enterprises, and informal lenders from whom they have been borrowing. That means virtually the entire non-farm sector.

And if it is sick, it is difficult to see who is going to revive the economy. But Subramanian and Felman have missed out on a third pair of balance sheets.

It is the central government, and its financier, the Reserve Bank of India. Sitharaman had budgeted for a generous fiscal deficit, and former RBI governor Urjit Patel had reluctantly promised to finance it. But she ran up the deficit she had budgeted for the entire year in the first six months. And the responsible economist in Patel was not prepared to let her run amuck the same way in the second half-year.

Yes, Minister

So, Patel was kicked out of his seat high above the Mumbai harbour, and a willing successor from Delhi was sent to replace him. Sitharaman only had to ask, and Shaktikanta Das would print money and buy the central government’s bonds on whatever scale suited her.

The finance minister, therefore, can now freely spend beyond her means, and raise the deficit from 4.8% to 9.6%, 14.4% or 19.2%. It would no longer be the India we have known, but one we have been lucky to avoid knowing — a feckless economy more in the Latin American style. No growth, only inflation.

As we get millions in our bags, we will be elated — until we go and spend them in shops, and find how little they buy. Can this contretemps be avoided? It can be — if Sitharaman restores the independence of RBI, and sternly balances her Budget. That is what any good economist would tell her.

But her government has specialised in getting rid of good economists. Some, fortunately, still do not give up on it, even after going off to Harvard. Arvind Subramanian keeps coming to India every few weeks, giving thoughtful analysis of the crisis.

The problem is not with the economists. It is with their employers in New Delhi. They have read the ancient scriptures, they have all the wisdom, and do not need to import it from ‘the west’, even if it is offered with an Indian accent. For them, there is no economic problem.

Maybe they should call Alexandra Green, the doctoral student from the University of Sydney’s School of Life and Environmental Sciences. In a December 2019 study published in Nature, Green, along with other researchers, listened to cows and found that the animals communicate with each other about how they feel. Perhaps these cows have economic counsel to offer that our government would appreciate more.

(The writer is former chief economist, ministry of finance, GoI)


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