By K Raveendran
His voice is few and far between. But when it does, it comes like that of an oracle. That’s former Prime Minister Manmohan Singh.
His description of Modi’s demonetisation as the ‘monumental blunder’ still rings loud and true. A man of few words, there has not been anything more precise and to the point about Modi’s botched initiative that brought untold misery to the country and its people. Although years have passed and much water has flown down the Ganga, carrying even more pollutants downstream, the country is yet to recover from the disaster and the dire straits that the economy is in today may well be the result of that fatal mistake, among a few others.
Like the self-effacing oracle, the man has spoken again. This time about what the Modi government could do to take the economy out of the morass that it finds itself in currently. There is no fancy stuff, though: it’s all about the basics. But a more striking feature is the earnestness and sincerity.
He can’t be more true when he advises the Modi government to overcome its obsession with ‘headline making’. The problems with the economy are too serious to be tackled with window dressing. If anything needs a real surgical strike, it is the economy. Targets across the border can wait. There is more terror in the economy than there is in Kashmir or anywhere along the Line of Control.
Whether the government accepts it or not, the hard fact is that the country is facing a recession, just as many parts of the world are going through such a phase. Finance Minister Nirmala Sitharaman has been trying to dodge the issue by pretending that the lack of demand in the economy is peripheral and that it can be addressed by piecemeal efforts. She has already announced a few measures to improve the situation, but her feeble mutterings are completely lost in the shouts for help by the affected parties.
As Manmohan Singh has pointed out, the first thing that the government needs to do is to come out of the denial mode and accept that there is a serious problem at hand. The slowdown is the result of both cyclic and structural problems and demands appropriate solutions. The former prime minister says that the problem is cyclical and as such any expectation of an easy turnaround would be unrealistic.
The former economist has suggested a five-point reforms programme to help the economy tide over the trouble. These include tweaking the GST regime to correct some of its grave mistakes, efforts to revive agriculture and boost demand, infusion of liquidity in the system for capital formation and key labour-intensive sectors such as textile, automobile, electronics and affordable housing. There is need to loosen purse strings so that there is greater access to credit, which has nearly dried up.
The Reserve Bank of India has announced a series of measures to improve credit availability, but these have not yet produced the results, and this means there is need to do more. The latest RBI move was to lower the risk weight of consumer loans. Under the standardized approach for credit risk management, consumer credit, including personal loans and credit card receivables attract a higher risk weight of 125 per cent or higher, if warranted by the external rating of the counterparty. It has now been decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100 percent.
The Oracle’s voice seems to have evoked a more positive response from the finance minister as she was reportedly giving finishing touches to yet another instalment of stimulus measures. These are expected to cover the automobile sector, which is going through one of its worst crises, with huge monthly drops in off-take of vehicles, forcing the manufacturers to announce production holidays and worker layoffs.
The industry is looking towards sector-specific measures, which the finance minister is expected to include in her announcement.
In this respect, it is pertinent to note that a working paper of the RBI had recently spoken about the county going through a financial cycle, the impact of which is likely to last for long. It said there is a well-defined financial cycle in India and its expansionary phases, particularly the peak, provide an early warning signal about rising stress in the banking sector and weakening of economic activity in future.
It is assumed that the average duration of financial cycle is much longer than that of business cycle and could disrupt the structure of financial system immensely. On an average, the volatility of financial cycle has been found to be almost 1.5 times larger than that of the business cycle. According to the paper, during 2002-2007 and 2011-2018 there were periodic co-movements between business and financial cycles.
The average duration of business cycle in India has been found to be of about 5 years as compared to 15 years for credit cycle in the post-reform period. The length of cycles in exchange rate is nearly identical to the duration of business cycle whereas credit-to-GDP ratio and house prices experience cycles of much longer duration. (IPA Service)
