That awkward moment when RBI governor says something that actually makes sense
The message of Reserve Bank of India governor Urjit Patel comes right before the announcement of the Union Budget by the Narendra Modi government. Fiscal consolidation and macroeconomic stability are economic fundamentals; you can’t swerve around them with populist plans.
It behooves the government to be reasonably sensitive to the already adverse external environment, which is unlikely to become favourable in the foreseeable future.
Always around Budget time, the clamour for fiscal concessions gets louder, especially with the incipience of demand slowdown caused by withdrawal of high denomination bank notes.
The government can't resist not loosening the purse strings to ameliorate the condition of the people, suffering for long because of the effects of demonetisation.
In this backdrop, Patel's recent statement assumes importance - that “borrowing even more and pre-empting resources for future generations” can’t be a short-cut to achieving durable long-run higher growth.
Also, he added significantly, that going already with “a high government deficit, it is ill advised to step up government borrowings, which will crowd out private investment and paper over the urgent need for more abiding reforms".
The RBI governor's specific suggestion to reorient government expenditure towards creation of more public infrastructure, such as expansion of the railway network, urban mass transit systems, even as it leads to reduction in the oil import bill and provides concomitant reduction in air pollution. It is equally mandated by the climate conference held in France on April 22, 2016, for limiting global warming.
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| People have been suffering for long under the demonetisation drive. |
At a time when RBI’s independence and freedom are under siege post demonetisation, Patel's message comes as a welcome move to instill new hopes in the minds of people about the independence of the institution and to reinstall its image as the central bank.
He especially pulled it off well when he spoke of the risks posed by policy interventions of the government in the form of guarantees and possible interest rate subvention.
Although not alluding directly to the PM’s announcement of doubling credit guarantees for micro, small and medium enterprises, Patel’s statement still highlights the underlying risks of increased government liability and the moral hazards posed by high-risk premium on government borrowings, apart from impeding optimal allocation of financial resources that the said announcement entails on the government.
The better solution, according to him, would be to resolve constraints such as transaction costs related to clearances and burdensome taxation bureaucracy.
According to Patel, “it is easy and quick to fritter away the fiscal gains made through demonetisation and other attendant measures aimed at ushering in greater economic prosperity to symbolise macroeconomic stability, but it would be much harder and slower to regain them”.