Is RBI Fill­ing Macro Man­age­ment Vac­uum?

In es­ca­lat­ing trade and cur­rency wars, there is no macroe­co­nomic mes­sag­ing from FM

The Day After - - CONTENT - BY DANFES

Whether it is UPA or NDA rule, the one thing com­mon is how global eco­nomic fac­tors pro­foundly im­pact do­mes­tic macroe­co­nomic man­age­ment. There­fore, fi­nance min­is­ter Arun Jait­ley must not over­state the case that the econ­omy pro­duced “less than mod­est growth” in the last four years but the “qual­ity” of macroe­co­nomic man­age­ment was bet­ter than seen dur­ing the UPA ten­ure.

The fact is ex­ports, agri­cul­ture, in­dus­trial pro­duc­tion, pri­vate in­vest­ment and bank credit have all shown sub-par growth over the last four years. There is no get­ting away from this re­al­ity, what­ever spin the fi­nance min­is­ter may give.

Jait­ley’s ar­gu­ment it­self sounded a bit like sour grapes for it was made in the con­text of a Na­tional Sta­tis­ti­cal Com­mis­sion study that re­leased the long-awaited GDP back series data, which showed the UPA gov­ern­ments ac­tu­ally pro­duced even higher growth dur­ing its ten years, with over 10 per­cent GDP growth for two of those years.

The data re­leased by the Na­tional Sta­tis­ti­cal Com­mis­sion was hastily de­clared a “draft re­port”, and not the of­fi­cial view of the gov­ern­ment, af­ter BJP higher-ups re­alised that the NDA-II gov­ern­ment was be­ing shown in poorer light via-à-vis the UPA on key eco­nomic per­for­mance met­rics.

Jait­ley’s claim of bet­ter macroe­co­nomic man­age­ment also rests on thin ice be­cause the fact is global fac­tors ac­tu­ally lay the foun­da­tion of do­mes­tic macroe­co­nomic man­age­ment. The RBI gov­er­nor made a telling com­ment re­cently af­ter he raised in­ter­est rates for the sec­ond time in six months. He said the global econ­omy has al­ready ex­pe­ri­enced trade skir­mishes fol­lowed by a trade war, and now we are see­ing the be­gin­nings of a cur­rency war. Then he obliquely sug­gested that all In­dia can do is sit tight and fas­ten its seat belt.

In fact, the RBI’s de­ci­sion to hike in­ter­est rate twice is largely aimed at de­fend­ing the ru­pee against a po­ten­tial attack on emerg­ing mar­ket cur­ren­cies caused by the twin events of a trade war-led weak­en­ing of the Chi­nese econ­omy and cur­rency com­bined with the US dol­lar strength­en­ing via in­creased in­ter­est rates by the Fed­eral Re­serve.

The RBI gov­er­nor knows this only too well. Arun Jait­ley will also do well to take these fac­tors into ac­count be­fore mak­ing san­guine pro­nounce­ments on NDA’s macroe­co­nomic man­age­ment.

The cen­tral bank is far more re­al­is­tic in its as­sess­ment of the sit­u­a­tion. Its two-stroke repo rate in­crease is also in­dica­tive of the fact that it is not en­tirely sat­is­fied with the Cen­tre’s fis­cal man­age­ment and wants to cre­ate a bul­wark against pos­si­ble slip­page. As The Wire re­cently re­ported, the na­tional au­di­tor has pointed to a gap of over Rs 50H000 crore in the ac­tual fis­cal gap ver­sus the num­bers shown by fi­nance min­istry in the bud­get doc­u­ments for 2015-16.

Be­sides this, the Cen­tre has been mer­rily dip­ping deep into the re­serves of cash-rich PSUs like ONGC, NTPC and even LIC to meet

its ex­pen­di­ture gap. This amounts to merely shift­ing bor­row­ings from gov­ern­ment books to the bal­ance sheet of these PSUs. This is pure win­dow dress­ing. The RBI does not par­tic­u­larly re­gard these mech­a­nisms as con­sti­tut­ing a struc­tural re­duc­tion in fis­cal deficit.

In fact, of late, the bulk of macroe­co­nomic man­age­ment has fallen on the shoul­ders of RBI as there was lit­tle clar­ity on who ran the fi­nance min­istry. Af­ter chief eco­nomic ad­viser Arvind Subra­ma­nian an­nounced his de­par­ture, there was even less clar­ity on who was sup­posed to com­mu­ni­cate macro pol­icy from New Delhi. There was a ver­i­ta­ble vac­uum at a time when global trade and cur­rency wars were es­ca­lat­ing.

The RBI, there­fore, stepped into this vac­uum and has taken charge. There has been vir­tu­ally no macroe­co­nomic mes­sag­ing com­ing from the fi­nance min­istry.

Re­cently, as the ex­change rate of the ru­pee tum­bled be­yond 70H depart­ment of eco­nomics af­fairs sec­re­tary Sub­hash Chan­dra Garg was quoted as say­ing that the fall­ing ru­pee was not a con­cern for the gov­ern­ment – even if it touched Rs 80 to the dol­lar – as long as other cur­ren­cies are fall­ing in the same range.

This was dis­as­trous com­mu­ni­ca­tion on some­thing as sen­si­tive as the ru­pee’s ex­change rate. You are ef­fec­tively sig­nalling to the global mar­ket that In­dia is will­ing to see the ru­pee weak­en­ing to even Rs 80 to a dol­lar if other cur­ren­cies fall in that range. This is tan­ta­mount to say­ing if China de­val­ued its cur­rency by 15 per­cent to 20 per­cent in or­der to neu­tralise the higher tar­iffs im­posed on it by the USH In­dia will also do the same. Mak­ing such an open ad­mis­sion even be­fore an event had oc­curred shows lack of ma­tu­rity.

Former chief eco­nomic ad­viser Arvind Vir­mani, who worked with both NDA and UPAH tells me that never be­fore had ei­ther RBI or fi­nance min­istry spo­ken of a spe­cific fig­ure as an ap­pro­pri­ate ex­change rate. The de­fault po­si­tion on cur­rency man­age­ment is al­ways that the ex­change rate is mar­ket­de­ter­mined and the RBI in­ter­venes only to check volatil­ity.

How­ever, in the cur­rent regime all man­ner of state­ments are be­ing made by of­fi­cials with­out re­al­is­ing their mar­ket sen­si­tiv­ity. To­day, global cur­rency spec­u­la­tors are con­vinced that In­dia is ready to see the ru­pee de­pre­ci­ate much more in the com­ing months. Jait­ley also said In­dia has enough re­serves to de­fend the ru­pee. That was an ut­terly de­fen­sive state­ment be­cause when you have enough re­serves you don’t boast about it and in­stead let your ac­tions speak.

Arun Jait­ley, who is back in the sad­dle af­ter sev­eral months of med­i­cal leave, must un­der­stand that proper com­mu­ni­ca­tion and in­tel­li­gent sig­nalling of pol­icy is one of the most im­por­tant parts of macroe­co­nomic man­age­ment.

His gov­ern­ment must get over the NDA ver­sus UPA bick­er­ing and fo­cus on the gath­er­ing clouds of macroe­co­nomic risks on the global hori­zon. This is no time for scor­ing petty brownie points over the per­for­mance of past regimes.

RBI Gov­er­nor Urjit Pa­tel, RBI deputy Gover­nors NS Vish­wanathan, BP Ka­nungo and Vi­ral V Acharya ar­rive for a press con­fer­ence

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