Mint, New Delhi Capital Calculus column
Nov 04, 2012 (Menafn - Mint - McClatchy-Tribune Information Services via COMTEX) --Almost immediately after the Reserve Bank of India (RBI) pronounced, as had been widely anticipated, no cut in policy rates, finance minister P. Chidambaram spoke from the heart and said, "Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone."
The finance minister's disenchantment is understandable.
As the custodian of the nation's vastly depleted finances, he has the unenviable task of contending with the bad fiscal karma he inherited, continuing to feed the populist commitments of his government and, at the same time, keep the country from plunging into the throes of a full-blown economic crisis. And of course, as a politician he has to address the ire of growing tribe of the EMI (equal monthly instalments) club as they see rising interest rates shrink their monthly household budgets and magnify their debt. Not only is the bedrock of India's consumer economy under threat, the finance minister must be acutely conscious that this enraged middle class will in 18 months (if not earlier) be also turning up at voting booths across the country.
Yet, the fact of the matter is that this is not a case of growth versus inflation as the finance minister's with-me-or-without-me remark and follow-up comments may suggest. Growth or inflation are both outcomes of economic actions -- very much like fever is a symptom of some malfunction in our body. Also, it is not a case of either-or; you can, with associated risks, have high growth with high inflation, low inflation and high growth and so on. Of course, the most desirable situation is high growth with low inflation.
In the Indian context, it is a fact that growth is a problem and so is inflation. What probably influenced RBI to focus on inflation was how dramatically its forecasts on both parameters have reversed in the span of seven months. In April, it forecast a growth of 7.3% and an inflation of 6.5% for the current fiscal year; last week, RBI revised it to 5.8% and 7.5%, respectively.
So the debate should be on the causes -- it is, unfortunately, not one single cause -- underlying the present macroeconomic circumstances. Unfortunately again, the current terms of the debate make it polemical and automatically eschew anything meaningful.
Inflation, as basic economic logic tells us, is brought about by too much money chasing too few goods. So the logical solution is to compress demand and restore parity, unless you are able to step up supply. In India's case this is unlikely to happen in a hurry, given the constraints on infrastructure, plateauing of agricultural growth, long-pending tax reforms like a goods and services tax. So naturally focus has to be on demand, bulk of which accrues from the government; and since there isn't commensurate revenue to match the big spending of the government, inevitably it means borrowings -- or what in jargon is known as the fiscal deficit.
And like bad karma, excessive borrowings can come back to hurt you, which is the nub of the problem. Previous borrowings are now coming up for repayments and there is a bunching up from the beginning next fiscal, 2013-14. Repayments would rise from Rs.5,000 crore in the current fiscal to Rs.0.95 trillion in 2013-14, Rs.1.68 trillion in 2013-14 and so on to peak at a staggering Rs.2.34 trillion in 2018-19. The point is that so far only a fraction was going towards repayments, but from now on the government would have to borrow extra to repay past debts unless it achieves a radical overhaul of its expenditure management.
Ignore what RBI wants for the moment. Instead the focus should be on the problem at hand. There is no quick-fix solution (as some commentators seem to suggest) to the problem. As Prime Minister Manmohan Singh remarked last week, the Congress party needs to ignore the political calendar and focus on nation-building. If there is a moment, it is now.
Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com
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