Can elites sleep peacefully with this?

Rahul Gandhi is pushing the country off the fiscal cliff with unprecedented populism in an equally unprecedented desperation to come to office or stay relevant at all. For him, it is a personal existential question. So, country does not really matter here.

He is stirring competitive populism everywhere. Gujarat has written off power dues now. There will be more to follow. He is pushing both Congress-ruled States and the Union government to engage in fiscal recklessness.

Just as the NDA Government’s measures have long-run positives (GST, IBC and even, arguably, demonetisation) and short-run costs, his populism will hardly have any short-term redeeming features but substantial long-run costs. It is the flip side of NDA’s structural reform efforts.

More importantly, even the fiscal populism is only of second order importance. The first order issue is their effectiveness in addressing the underlying issues and durability of such effectiveness. The absence of both  has been established repeatedly. But, the Congress Party is not one to bother itself with such evidence.

On Friday, a brief research report from the Chief Economist of the State Ban of India came to me. He offers a simple proposal that might make a big difference both for banks and for farmers:

As per the existing norms of asset classification for agriculture advances, in case of an agriculture cash credit account a farmer has to repay the entire outstanding (principal along with interest) to seek fresh loans from the banks unlike other segments of cash credit business where if the borrower has cleared interest payments and ensured submission periodic stock statements, he/she would be eligible for enhancement/ renewal eventually continuing as a performing cash credit account.

It would be in the benefit of all, if the farmer is given renewal/enhancement based on deposit of applicable interest to the bank and the submission of periodic stock statements (which may be linked to the yearly crop cycles) especially if the bank is satisfied with the farmer in terms of his/her land holding/paying capacity etc.

If we align the NPA classification norms for KCC and crop loans for agri at par with other segments, we can also save as much as Rs 37,000 crore on being classified as NPAs. It would not only help the farmers but would also help the banks in saving capital on account of provisions made towards these otherwise avoidable NPAs!



My friend Dilip Subramanian forwarded me an article written by Shamika Ravi in July 2015 which is worth re-reading now. She wrote about farmers’ suicides and said that analysis of data showed that debt was not a factor but health issues and expenditures were.

In India, fiscal profligacy has always occurred under Congress watch and it has been left to the two NDA governments to repair them. Yet, the rallying cry of elites is that the NDA government is about to slip into the fiscal abyss.

Surely, demonetisation cannot be the worst policy decision since independence in the face of such repeated criminal fiscal irresponsibility.

Opinion-leaders – collectively – must issue a strong, unequivocal, joint public statement against this journey into fiscal disaster and economic oblivion that the President of the Congress Party wants the country to embark on, collectively. Silence on the part of elites will make them partners in crime.

Lord Skidelsky on central bank independence

An important letter by Lord Skidelsky:

Chris Giles and Sam Fleming rightly note the growing conflict between central bankers and elected politicians (December 10), but fail to explain how this has come about and how it should be resolved. They note that before 2008 central bank policy limited the “volatility of inflation”, though it then “signally failed to prevent the financial crisis”. There is surely more to be said. Limiting the volatility of inflation was an important achievement, but it is far from clear that central banks had any control over the inflation rate itself.

As Mervyn King has said, they had a “nice environment for monetary policy” because of the downward pressure on world prices from the entry of millions of low-paid east Asian workers into the labour market. The failure of central banks to prevent — or even foresee — the 2008 financial crash stems directly from their acceptance of Eugene Fama’s efficient market theory, which implied that commercial banks needed only light regulation. Central banks have played a crucial but hardly stellar role in the recovery from the crash.

Most of the money pumped into the economy by quantitative easing leaked out into the financial and real estate sectors rather than stimulating the real economy. As your columnist John Kay pointed out ( July 9, 2013), “the one certain consequence of boosting asset prices is that those with assets benefit relative to those without”. Monetary policy is neither particularly effective nor politically neutral. Since governments, not central banks, are accountable for the results of policy, macroeconomic management cannot be outsourced to central banks. The two arms of policy, fiscal and monetary, need to be integrated. The experiment of independent central banks has to be brought to an end.

Lord Skidelsky FBA

London, SW1, UK

Are India’s ‘shadow banks’ a bigger risk than China’s?

Well, that is what Andy Mukherjee thinks or his editorial team thinks, if one went by the header of the article that he has written.

Now that New Delhi has replaced an independent-minded technocrat at the Reserve Bank of India with a former finance-ministry bureaucrat, it’s reasonable to expect that shadow banks will be encouraged to expand again.

That is quite a loaded sentence. Airbrushes or ignores a lot of other issues with Mr. Patel.

T.T. Ram Mohan offers an alternate perspective that is well worth a read. This paragraph is worth noting:

Thirdly, the particular suggestions from the government that have led to tensions with the RBI cannot be construed as attempts to infringe the autonomy of the central bank. Take, for instance, the issue of the appropriate level of reserves for the RBI. This is a technical matter on which reasonable people can legitimately differ. It is entirely appropriate to refer the matter to an independent committee. This would not have happened had the government not pressed its point vigorously.

He ends on this note:

Will New Delhi be prepared to pull the rug from under the non-bank lenders if they push things too far? On that count, hold no hope. China’s shadow banking may be a lot bigger than India’s, but India’s is already too big to fail.

May be, he is right. But, I think he is far too dramatic here. Banks are being recapitalised and lending has picked up. So, I am not sure if India’s NBFCs are ‘too big to fail’.

Bangladesh and Maldives

With Rahul Gandhi occupying the front pages with his exemplary ‘prudence’ on farm loan waivers, this news-story did not get the attention it deserved – India’s offer of assistance to Maldives. Well done.

While I am rather pleased and impressed with the progress that Bangladesh has made and I am very happy for them, I do detect signs of hubris when the Prime Minister talks of achieving 9% GDP growth, etc. I am sceptical of such claims. It is still largely reliant on garment exports. Impressive that the per capita income has risen to USD1750. But, the economy is not diversified enough to be able to achieve and sustain a growth rate of 9% per annum. Plus, the loans to China should cause concern.

More importantly, it is good for her to realise that the current status did not arrive due to a pre-meditated plan. That is how it usually is. The end of MFA, the rise of costs in China, India’s inability to up its game on textile exports, etc., contributed. Understated confidence would do no harm at all. That said, a good story to read. Happy for them.

Macron bubble and protest vote in Spain

Recent French protests at the Fuel tax has multiple dimensions:

France is a high-tax country; but the question is whom does government provide relief – Macron reduced wealth tax earlier; fuel tax affects all; it is also a climate change issue; the vandalism that the protesters engaged in, targeted affluent communities, cafes and boutiques. Macron’s approval rating is one-fifth. 

Gideon Rachman on the Macron bubble that has burst. A rare piece of candour and correct opinion.

Much to reflect on the global angst and anger, manifested in the protests in France and protest vote in Spain.

Recently, Wall Street Journal has gloated that Thomas Piketty’s work on inequality has been discredited by recent research from the American Institute of Economic Research. May be, they are right. I have not seen their work. But, that makes the global angst and anger an even bigger puzzle. What is the motivation?
Wolfgang Muenchau on how the broken plane that led Merkel to catch an Iberian Air flight to go to Buenos Aires for the G-20 summit meeting is an apt metaphor for Europe. I agree with him. [Link]

Èconomic strategy for India’- part 2

The first part of this blog post  dealt with the proposals made by some experts recently. This post captures the proposals that I feel are worthwhile. They are based, largely, on my work (past and ongoing) with my friend and co-author Gulzar Natarajan and our several periodic conversations:

(1) International empirical evidence suggests that firms that start formal by educated individuals have a much higher chance of growing and creating employment. Enabling policy framework for this needs to be put in place – funding, incubation support and more importantly tax policies.

The uncertainty over contribution by angel investors being treated as income in the hands of the start-up companies has to be resolved. This was introduced in 2012. It is still a vexing issue. See here.

(2) Tax department has to have an overhaul in terms of philosophy.

They need to target evaders, using data and technology. But, interpreting law always in favour of ‘revenue’ has to be diluted. The Finance Minister and the PM of the day must make sure that the tax department is in alignment with overall policy goals. This is the overriding priority of any government now or six months later.

Recent examples:

Proposal to treat banks’ free services as taxable service income by imputing a value to them and to levy tax on them.

A ruling by ‘Authority for Advance Ruling’ that back-office operations of IT companies will be deemed domestic service and not exports and subject to GST of 18%. This boggles the mind. Some of the proposals are so stunning that one wonders if they are aimed at neutralising the government’s economic agenda.

There is a need for mindset shift in the Revenue Department, while keeping funding needs for development expenditure in mind.

(3) Crop insurance for farmers is a good idea but States are dragging their feet on payment of premiums. This scheme has to be reviewed and loopholes plugged. There is not much that the government can do about rainfall, harvest and international prices. But, risk mitigation is possible. Crop insurance provides that. That needs to work. (Neelkanth Mishra has covered this).

(4) Trade Receivables Exchange is now operational. This needs to expand and the government (MoF and MCA acting in concert) has to make sure that companies mandatorily participate. The Board of Directors should be made responsible to monitor companies’ compliance with this.

(5) This government’s proposal to pay EPF contributions for employees earning salary up to 15000 Rupees per month for three years should be extended to all formal sector workers earning up to Rupees 50,000 per month.

(6) White paper – as demanded by Dr. Y.V. Reddy on Feb. 1 in a speech – by RBI on the NPA problem and its own regulatory shortcomings needs to be released. This should lead to a revisiting of the regulatory architecture for public sector (government-owned) and private sector banks so that they are level, as far as possible. Government’s non-interference in operational decisions of commercial banks must be made statutory.

(7) Revisit and revamp ‘Right to Education’ legislation and make it outcome oriented and make sure that it does not lead to shutdown of schools. Perverse outcomes should be avoided. Discrimination against educational institutions by the majority community should go. (This finds a mention in the Économic Strategy for India’).

(8) All places of worship of all religions should be freed of government control.

(9) Freeing up Higher Education – the spirit of Economic Liberalisation of 1991 must now be invoked in Higher Education with regulatory authorities put in place before doing so.

(10) Investing resources – funds and personnel – to bring our macro-economic data – at the Federal and at the level of States – up to international standards in terms of timeliness and reliability

(11) Electronic road pricing during peak hours (morning and evening) in top ten metros. Staggering of hours between educational institutions and offices. Energy consumption for transport is the biggest source of energy bill and it is also the biggest pollutant in Indian cities.

(12) Re-thinking the architecture of public transportation – integrating road, rail and water (where relevant). Introducing ‘park and ride’ options in Metros in all stations. Reduce road congestion and dependence on private transportation. Multiple benefits: esp. with respect to pollutants, easing road congestion, improved productivity and less stress.

(13) GST Council Meetings should be used as a forum to exchange ideas, share information on best practices, policies pursued in States and evolve consensus on important issues – land reforms, electricity pricing, water pricing, education reforms, for example.

(14) Personnel selection for governments and related institutions including regulatory bodies:

Merit-based appointment of key personnel in key departments and Ministries, institutions, in regulatory bodies – evolution of appropriate criteria, emphasis on merit, non-partisan, from private sector where necessary.

(15) Revisit, revise and revamp curriculum for officers selected for civil service. Dehra Dun has to be completely re-examined: international experts must be invited to re-design curriculum, provide inputs. Global issues, priorities and statecraft, negotiation strategies, interpersonal and behavioural dimensions must become part. (Some op.-eds., written jointly by Gulzar Natarajan and Duvvuri Subbarao cover these aspects).

(16) The above should be revisited and new training made mandatory when civil servants graduate from their initial jobs in villages, cities and in smaller units to State Capitals and then to Delhi. They need different skills, mental attitudes and concepts.

(17) The Cabinet should follow principles of corporate organisations and be arranged efficiently. The Modi government had the right idea of organising Super-Ministries. It did it in only or two instances. It needs to be pursued more thoroughly in all possible areas.

Some examples:

– Food and Agriculture, Irrigation, Water Resources, Chemicals and Fertilisers

– Energy, Coal, Renewable (probably, this is already there)

– Railways, Road, Water Transportation

(18) The Government and the Reserve Bank of India must revisit the inflation targeting regime. If not scrapping it, they must raise the central rate to 6% and set a range of  5% to 8% around it.

(19) Finally, the PM must take personal responsibility and the PMO monitor these and report to the nation – where feasible – on the progress on these areas.

Evaluating the Économic Strategy for India’ – part 1

On the 14th December, Raghuram Rajan, former Governor of the Reserve Bank of India released a collection of documents assembled under the broad header,  ‘Economic Strategy for India’. It is meant to provide a set of policy proposals for the new government coming to office in May 2019. The overall Executive Summary is here.

I went through some of the individual documents that made up the overall Executive Summary.

I liked Sajjid Chinoy’s document on de-risking the external sector. It contained some specific proposals. They were not ‘high altitude homilies’. I had mentioned this before. But, it is worth repeating: In September 2015, when I was one of the invitees to the PM’s meeting on Economic Strategy for India, I had recommended taking long out-of-the-money call options on crude oil then, because crude oil prices had plunged. I had also recommended fiscal policy relaxation to the tune of 0.5% of GDP solely directed towards recapitalising banks. Not that both were adopted, however. Sajjid recommends active hedging of crude oil. He recommends strengthening the FX reserves through active swap agreements. Both are worthwhile suggestions. 

I went through Prachi Mishra’s ‘Responsible growth: way forward for India’. It is full of recommendations on fiscal rectitude. I think the best response to that was written by my friend Srinivas Thiruvadanthai in Swarajya. Pl. see his comments here. Srini’s comments were about whether fiscal profligacy played a role in precipitating India’s ‘Balance of Payments’ crisis in 1991. It had a role but not THE role. Fiscal policy has its place in managing aggregate demand. Historically, India has not been profligate. Least of all, this government.

In general, Srini says that in comparison to Latin America, India has been mostly fiscally prudent, despite tendency towards populist measures. So, making such sweeping recommendations on fiscal rectitude without even acknowledging the need to take the recommendations in context-specific fashion is ill-advised.

Another bunch of homilies is from Eswar Prasad on the financial sector reforms and some of them could even be counterproductive. The Government of India and the Reserve Bank of India (especially the latter) have been making haste slowly in liberalising the financial sector. It should continue.

Raghuram Rajan’s proposals for the banking sector are mostly familiar. I had made more specific suggestions in my ‘draft’ speech for the Prime Minister on Banking Reforms published in March 2018. To be clear, most of my recommendations in that speech were drawn from speeches made by Dr. Y.V. Reddy over the years.

Neelkanth Mishra makes a sincere attempt at getting granular with respect to agricultural reforms. His proposals are best read in conjunction with Ajit Ranade’s latest op.-ed. on the problems plaguing Indian farmers.

Neelkanth Mishra’s energy reform proposals follow a similar path. Perhaps, he has not spelt out all that he wished to. Arvind Subramanian, in his book, Óf Counsel’ makes the case for using coal, even if it has to be made more eco-friendly before doing so. India cannot abandon its vast coal reserves and its thermal power plants. Stranded assets – as Arvind puts it – will also add to the government burden. India needs to develop energy options commensurate with its energy needs and endowments. It cannot become a ‘çarbon hostage’ of the West. Arvind’s chapter on this is worth a read.

Not much specifics are there in the proposals on the environment. I would say that my good friend Mridula Ramesh has made far more feasible and implementable set of proposals on environment, water and climate change than most others. Worth reading her book and her articles in Firstpost.

Also, more practical stuff has been written on the labour market by Manish Sabharwal than most others. See his latest in MINT, for example.

I did not read the other proposals. The general impression that one gets is the proposals are familiar. That is not a criticism. Good things bear repetition so that they are reinforced. But, they are mostly in the nature of homilies. The Executive too knows what needs to be done. There are plenty of recommendations from committees over the years. The Executive needs solutions and suggestions to overcome or sidestep ‘political economy’ hurdles and it needs more concrete action blueprints, covering A to Z. 

A concrete set of proposals – across different sectors – but by no means complete – is made in part 2.

(Postscript: Now that Mr. Rahul Gandhi has said that he would not let Modi sleep unless all farm loans are waived, I wonder if the experts would issue a statement expressing concern (if not condemnation). They had recommended that governments abandon the path of loan waivers and rightly so. Will be interested to see the stance they take on Mr. Gandhi’s destructive and counterproductive populism. Obviously, he and his party have learnt nothing from their disastrous rule of 2004-14)

Retreat of liberal economics

My topic for the MINT column coming Tuesday was partly inspired/provoked by this piece by Vivek Dehejia in the Nikkei Asia Review. He laments the retreat of liberal economics. He should not. Western economies did not become prosperous by following liberal trade or with independent central banks or by encouraging free capital flows. 

Even if one were to vote for free trade, it has to come with caveats on compensating losers. That never happened in many countries in the world. Winners – capitalists – became richer. Losers faced job insecurity and diminished incomes. But, to lump capital flows with trade flows is flawed and dangerous:

The acolytes of Indic economics espouse an end to free trade and free movement of capital.

Dehejia’s mentor – Jagadish Bhagwati – distinguished between trade liberalisation and capital account liberalisation. 

Dehejia has harsh words to say on demonetisation:

His best-known achievement so far has been to oversee demonetization — the botched 2016 cancellation of high-value currency notes in a futile bid to fight corruption, that Prime Minister Narendra Modi insisted was necessary even though most economists said in advance it would be a disaster.

‘His’ in the first line in the above quote refers to Shaktikanta Das.

and this one:

The protectionist swing follows the earlier demonetization fiasco and the mismanaged introduction of a new national sales tax. Ironically, it was Das, the newly appointed central bank chief, who supervised not only demonetization but also the tax reform.

You must read the earlier pieces of Vivek Dehijia on demonetisation. You can find them here, here and here. The tone and the tune are very different now. I doubt if any new evidence has emerged since the last link above (September 2017) that justifies the about-face on demonetisation.

If anything, recent data from the Central Board of Direct Taxes vindicate the header of the last linked article that it was too soon to assess the success or failure of demonetisation. 

Clearly, the Goods and Services Tax (GST), in theory, could have been done better. The peak rate need not have been set at 28%, for example. Exempted goods could have been included. But, this is a continental size economy. Only Singapore has a single GST rate. Other countries have multiple rates. In short, India has not done too badly with the GST introduction and the subsequent course corrections. For another perspective, readers should read the book, ‘Of Counsel’ by Arvind Subramanian.

For some of the newspapers and columnists, Mr. Gurumurthy has become a lightning rod. My views do not correspond with his on all matters and he has acknowledged that we differ, in one of his tweets. That said, I find it hard to accept the argument that he has precipitated the departure of Mr. Urjit Patel from RBI.  Just to be clear, Patel is the fifth RBI Governor to resign.

Further, RBI has made many mistakes in recent years. It was late to wake up to the problem of non-performing assets. It ordered Asset Quality Review of banks only in 2015. It has not undertaken an honest review of its own shortcomings and failures in banking regulation.  The fraud in Punjab National Bank was going on for seven years. IL&FS was regulated by the Reserve Bank of India. On monetary policy, it had stuck to a version of doctrinaire monetarism.  The Government has not interfered with monetary policymaking, even if it has not been happy about it.

The accusation that India is returning to failed autarkic policies of the past appears too extreme. At best, it is a risk that needs watching. But, before that, the world has to avoid returning to the failed liberal economic policies of the last four decades.  For that to happen, so-called ‘liberal economists’ have to admit first that many tenets of ‘liberal economics’ were flawed and they were the fountainhead of many insurmountable problems that the world faces today.

In this regard, the rating agency Moody’s threat that any threat to RBI independence could be construed as needless interference. As I wrote in my earlier post, the Reserve Bank of India is not an independent body, created under the Constitution. It was created by an Act of Parliament. The Ministry of Finance is accountable to the Parliament for the functioning and performance of the Reserve Bank of India. RBI is now independent for the conduct of monetary policy. That has not been jeopardised and it has actually not covered itself with glory on that, with its excessive monetarism.  See Sanjaya Baru’s piece here for a different perspective.

A lumpy error by Tim Harford

By lumping Fed, BoE and RBI in one article, Tim Harford missed out the nuances. Trump’s sniping at the Federal Reserve is unfortunate. America needs a return to normal monetary policy because ultra-accommodative policies have created a lot of imbalances – social and economic. Asset price bubbles are back in many asset classes if not in real estate. Excessive leverage caused the problems in 2008 and leverage ratios are higher now. Eight years of near-zero interest rates and bond buying might have hidden risks in places that would be revealed only later. Therefore, normalisation of monetary policy in America is long overdue. Trump is wrong.

The Bank of England (BoE) inserting itself into the debate on Brexit has been ‘condemned‘ by Mervyn King himself, a long-standing former BoE Governor. Well, he was ‘saddened’. BoE eased pre-emptively in 2016 but the worst macro-economic consequences of Brexit have not materialised.

In India, the story is different. The Reserve Bank of India (RBI) is a creation of Parliament. It is not an independent organ of governance established by the Constitution of India. In the Westminster system of governance India has adopted, institutions created by Acts of Parliament are answerable to the Parliament through the Executive. The Ministry of Finance is answerable and accountable to the Parliament for RBI’s performance. Therefore, the MoF must have authority too, over RBI.

It had ceded the monetary policy function to a committee constituted by RBI and the Government together. The Government has signed an agreement with RBI for inflation targeting and hence the committee is responsible for setting the interest rate. The Government is not commanding the RBI to cut interest rates or intervening in this function. The previous Finance Minister in the previous government did so. He once directed the government-owned banks not to raise their interest rates when the central bank raised rates. That is blatant interference with the transmission mechanism of monetary policy.

The present Government had not acted to curb any institution that has been set up independent of the Executive, by the Constitution. Hence, the question of eorsion of institutional independence does not arise. Nor has it interfered with the monetary policy mandate of RBI which it has ceded to the central bank. One can argue on whether the central bank has excessive capital and whether there is a macroeconomic need for additional liquidity support by the central bank, etc. but the charge of ‘sniping’ is weakly founded.

Further, those who bat for central bank autonomy (independence is illusory except in the case of the Bundesbank and now the European Central Bank) should also bat for central bank accountability. In the West, central banks must be held accountable for their role in the rise of political and economic polarisation (wealth and income inequality and concentration of market power). Arguably, the former is the consequence of the latter.

In India, RBI must be held accountable for its failure to detect and take timely action on the rise of bad debts, on its monitoring of banks’ risk and compliance management systems with respect to frauds and on its regulation of non-banking finance corporations. With respect to monetary policy too, there is a reasonable case that it has been guilty of a doctrinaire approach to inflation-targeting. So, there is really no need to shed too much tears for the exit of the previous RBI Governor.