Aatmanirbhar Economics: A Critical Evaluation

As India emerged out of the cusps of the third lockdown, which lasted for around two weeks, the Centre said that it was in favour of opening up the economy. It had no real alternative to this quandary- almost replicating the likes of a catch-22 situation- after all, domestic industries and firms have been battered by the dip in production and consequent revenue loss due to a total disruption in supply chains. The pandemic, which has harboured an economic impasse of monumental proportions, also dumped with it a tide of unbearable suffering and a string of humanitarian challenges amongst the less privileged. A full-blown migrant crisis today threatens the very societal strand that fuels India’s growth and has been exacerbated multifold by a complete lack of empathy and concern for their case. Amidst such harrowing times and with widening mass-scale distress evident in the economy post the lockdown, direct fiscal intervention by the government was the need of the hour.

The ‘Aatmanirbhar Package’, a relief and stimulus package announced by PM Modi as worth ₹20 lakh crores, or nearly 10% of India’s GDP, was quick to raise hopes. Would the ruling dispensation opt for cash benefits and tax holidays, and relieve stressed sectors of their humongous debt burdens? With the net worth of the package split into five tranches, it necessitated a patient wait to find out whether the government was sincere in its attempt to provide an escape route. The bane of the pandemic’s impact soon blossomed into an opportunity for the government to drive home much-needed reforms, particularly in agriculture, defence, DISCOMS and the MSME sectors. Perhaps the most significant changes that came to fruition were the re-categorisation and easy capital access for the MSME industries, amendment of the Essential Commodities Act for agro-allied activities, automatic FDI approval of up to 74% in the Defence sector, and increased support for privatisation of strategic sectors. On closer introspection, however, much of the package is merely liquidity support from the RBI’s earlier market measures and credit guarantees by the government, and the direct fiscal impact and cash outgo for the government stands pegged at less than 1% of the GDP. A break-up of the same will further illustrate matters.

Looking beyond the obvious

It is evidently clear that the net cost of the Aatmanirbhar financial stimulus package to the government is much less than the projected 10%, realistically hovering somewhere around 5.29% of the GDP (Edelweiss estimates). However, direct fiscal support, which was most anticipated, was a huge let-down- totalling to a plaintive figure of 0.49% of the GDP. It does not come as a surprise, as the package involves RBI’s liquidity-boosting measures which were made earlier as a part of the scheme. Although the government controls the fiscal policy, the RBI is an autonomous body and decides the monetary policy through its bi-monthly MPC meetings. It is crucial to understand that the government’s expenditures and the RBI’s measures are not equivalent and hence, are not additive prima facie. Nowhere in the world has such a fiscal package been declared, which involves the support of the apex bank. An excellent case-in-point would be that of the United States’ $3 trillion (approximately ₹225 lakh crores) package, which was completely governmental expenditure and did not hold into account the effects of the Federal Reserve’s decisions. All in all, the deal is primarily aimed at supply-side measures, and there exists no provision for cranking up demand-side figures through a resort to deficit financing. The Aatmanirbhar Package is effectively medium to long-term in vision and does very little to alleviate the concerns of the economy in the immediate vicinity.

Let us take the case of the Micro, Small and Medium Enterprises (MSME) sector. A substantial chunk (nearly 94%) of these are labelled as micro industries, which were earlier handicapped by rigid investment parameters. The recategorisation now permits a more fluidic definition of the industries, basing the division on a turnover-based criterion to allow for higher investment limits. The differential grading for manufacturing and services MSMEs have also been eliminated. Under the new norms, micro industries should have an annual turnover fewer than ₹5 crores and an investment of less than ₹1 crore. This is a remarkable hike from the earlier investment criteria of a maximum of ₹25 lakhs for manufacturing industries and ₹10 lakhs for service-based firms. However, apart from the contextual change in definition, there is not much to cheer for. Instead of directly infusing money into the MSME sector, the government has chosen to tread the path of credit guarantees, by facilitating cheaper and easier loans to the tune of ₹300,000 crores. A provision for subordinate debt has also been included for “stressed” MSME firms and is worth ₹20,000 crores, out of which the government will partially guarantee ₹4000 crores. Thus, even in the event of a failure, the government will back up the lender with a part of the recovery amount.

However, credit guarantees often take time to materialise in totality. Loans are not instant; and even if the floodgates are opened, it is unlikely that the banking sector would like to get itself submerged in a torrential volume of small-sized loans. Rather, it may give rise to cronyism, where more prominent players are accorded the sizeable portion of the pie, while the comparatively insignificant firms are left in the lurch to fend for themselves. Even in the best-case scenario, availing of the credit facilities extended by the government may not do much good. The Chamber of Indian MSMEs (CIMSME) noted with displeasure that while they were hopeful of direct measures such as the waiver of electricity charges, salary payments and the like which would have helped them to stay afloat amidst the turbulent times, availing of new loans was simply put, an unviable option. Product marketing, sales and realisation of revenue is not possible in the pandemic situation owing to several curbs and restrictions. With no new contracts in sight and demand for the goods at an all-time low, industry scions are of the view that marginal utility for fresh capital would be negligible at best. Additional loans without sufficient production would also drive up the Incremental Cost Output Ratio (ICOR), thereby hampering growth.

The stimulus package also failed to bring about solid relief for the two worst-affected sectors post the lockdown: hospitality and aviation. A report prepared by the Confederation of Indian Industries (CII) with Hotelivate estimates a whopping loss of ₹30,000 crores in the hospitality sector due to high room vacancies and decreased takers for their F&B services. Even high-worth chains as Hilton and Hyatt have tied up with food delivery services to salvage whatever income is possible. Similarly, the cash-drought aviation sector- which has seen no commercial business for nearly two months now- had very little to look up to. Several requests for bringing the ATF under the ambit of GST and suspension of airport charges were ignored. A report by CRISIL, a rating agency, prognosticated a downturn of around ₹25,000 crores. However, most of the announcements made were retrospective in nature and were cardinally minor amendments to earlier introduced laws.

Final Thoughts

The post-COVID era may nourish fables of de-globalisation around the world, stoking alluring chimaeras of self-sufficiency and protectionist tendencies in an increasingly nationalistic global order. Under the garb of improving self-reliance, the government has now mandated procurement of local products and supplies for tenders below ₹200 crores. The move is regressive, fosters inefficiency and promotes pricier alternatives. India being an assembler economy, does not have the necessary technical know-how to immediately embark on manufacturing high-quality goods at a fraction of the current cost. In strategic sectors as defence, atomic energy and space research, opting for inferior products to re-energise local supply chains is an absolute no-no. Instead, financial support using Direct Bank Transfers (DBTs), skilling ventures, and clearing bureaucratic red-tape for MSMEs should be the preferred way out. A trading system with an unstable network of national embargos need not be necessarily safer. Protectionism will only aggravate the widening inequality divide between the poor and the rich. An inward-looking policy, after all, enfeebles the recovery and leaves the economy vulnerable in the long run. Perhaps India could take lessons to make its supply chains resilient not by domesticating them, but by diversifying them- thereby deconcentrating risk and benefitting from the economies of scale.

The foremost woe with the Aatmanirbhar India package is that despite having a robust focus on intent and execution, it falls trap to the idea of credit guarantees to resuscitate the economy from the vices of a two-month lockdown. There is not an iota of doubt that by going for supply-side measures instead of cash infusion and tax discounts to revive demand, the government has taken an enormous gamble. A successful recovery will be nothing short of a historic accomplishment; if not, the government risks going down the slippery slope of economic volatility for years to come. Both the BSE Sensex and Nifty tanked after the final tranche was announced, signalling disappointment for the regular investor. At this critical juncture, we have nothing concrete to comfort ourselves with, but to keep our hopes transcendentally pinned on Robert Frost’s philosophy: “Two roads diverged in a wood … I took the one less travelled by, and that has made all the difference”.

Much like a wager, indeed, only with the stakes raised incredibly high this time.

Under the Scanner: Relief Package to confront the Coronavirus Challenge

The Finance Minister’s ₹1.7 lakh crore stimulus package, to help India tide through the harrowing times that the coronavirus lockdown presents, is a welcome move. Barclays pegs the economic cost of the 21-day lockdown at ₹9 lakh crores, or around 4% of the Indian GDP. The biggest highlights are that of medical coverage for the health workers, to the tune of ₹50 lakhs, and extended rations for the poor (10 kg rice/wheat, and 1 kg of pulses for the next 3 months) along with Direct Bank Transfers (DBTs) for the needy.

Image may contain: 2 people, close-up — FM Nirmala Sitharaman, while addressing the press

The government has also systematically allocated resources so as to ensure smooth implementation. The Ujjwala scheme will provide 8.3 crore BPL families with free cylinders for the next three months. The daily wage rate for MNREGS workers has been hiked by ₹20 to ₹202. The old, infirm and widows will be paid an ex-gratia amount of ₹1000, which will be paid in 2 installments. Additionally, 20 crore women with Jan Dhan Yojana accounts will also be entitled to ₹500 per month, for the duration of the next three months to compensate for the downturn during the lockdown phase. For the organised sector, Sitharaman said EPF contribution of both employer and employee (12 percent each) would be paid by the government for the next three months, with some riders on the inclusivity net of such firms.

However, it is to be noted that the cash transfers along with the MNREGS hike is very minimal, and may not bring substantial relief. The MNREGS hike was due anyway. However, as many states have closed down the sites for such labour work, it is unclear how many can pragmatically benefit from such an increase. The relief package comes ladled with considerable financial burden for the government, at a time it grapples with the slowdown in the domestic economy and a low-lying world order. As the heavy bill of ₹1.7 lakh crores cannot be raised by taxation alone, the government may eye raiding the RBI’s treasure trove in the form of annual dividends, and possibly look for deficit financing through bonds.

The relief package comes with a considerable financial burden for the government, at a time it grapples with the slowdown in the domestic economy and a low-lying world order. However, in coming out with such a package, the government has done the right thing on both the personal and the societal level. It has avoided unwarranted deaths out of starvation, neglect, and other tragedies, while at the same time, it has also ensured that small industries and firms are not obliterated by the crisis that has the potential to set the economy into an anarchical state. The markets, which rallied by several points today, is perhaps indicative of the same. Yet, immediately after the crisis resides, the government must take immediate steps to kickstart the faltering economy, failing which the benefits provided for by the stimulus package would be foiled.

It would only be a matter of time before we can academically evaluate the benefits of government intervention into the humanitarian challenge that confronts India uniquely.

Thoughts on the RBI’s Independence

The country’s apex bank, the Reserve Bank of India, is back in the news again, and with concerns that have been aired earlier as well: on the autonomy and independence of the central bank. However, what makes it different this time around is the severity of the friction that currently dominates the atmosphere between the RBI and the government. In a recent lecture, the deputy governor of the RBI, Viral Acharya lashed out at the government for encroaching on the independence of the RBI and warned of disastrous repercussions if the role of the RBI was allowed to be undermined on purpose.

The disparaging remark triggered an avalanche of questions from commentators of diverse backgrounds. How much of autonomy should be granted to the Reserve Bank? Can the apex bank have a free run? More importantly, how much should the government ideally intervene in the day-to-day functioning of the RBI? The Reserve Bank as we know it today, was first institutionalised by the RBI Act (1934) under the British Raj. Originally, the role of the RBI was “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency any credit system of the country to its advantage.” In a world today which is highly interlinked and of which India aims to be an integral player, sour relations between the prime banking institution and the government can prove to be a major hurdle to a growing economy.

Exploring the RBI’s Claims

In this power tussle, both parties involved demand a fair share of their rights. The RBI has put up certain preconditions that it believes are essential for the healthy run of the Indian economy.

For one, it wants to exercise greater control over the Public Sector Banks. A volley of accusations were fired at the RBI after the humongous 13,000 crore fraud at Punjab National Bank. Urjit Patel, the present governor of the RBI, promptly responded by making it crystal clear that the RBI had far lesser control over the Public Sector Banks than it enjoyed over the private lending institutions. A quick fact-finding session revealed that RBI’s legal powers to supervise and regulate PSBs are very limited. It does not hold the authority to remove the PSB directors or the management, who are appointed by the government of India, and neither can it force a merger or trigger the liquidation of an ailing public bank. Its position in regard to any public bank is limited to that of a mere watchdog. Thus, in effect, the governor rightly rolled the ball back into the hands of the government by calling for effective legal reform that would grant the RBI supervisory powers over the Public Sector Banks, permitting it to do the needful at the right moment of time.
Certain opinions resonate that the Public Sector Banks could be recapitalized entirely if only the RBI paid a larger dividend to the government. The Reserve Bank feels that the Government should not mandate the quantum of dividends to be paid to it. The RBI generates surplus profits in a number of ways. It does so by issuing deposits to commercial banks, which are its liabilities, and on which it pays no interest whatsoever. It also buys financial assets from the market, typically domestic and foreign governmental bonds, which pay handsome interests. So, a large part of the income is generated simply because the RBI has not the need to pay the interest on its liabilities. This surplus profit is more than all of the public sector banks put together. This belongs entirely to the citizens. Thus, after setting aside what is needed to be retained to retain the creditworthiness of the RBI, the Board pays out the remaining surplus to the government. In 2016, the amount was 65,876 crores, in 2017 it lowered to 30,659 crores, and in the current financial year it was pegged at 50,000 crores.On delving into former governor Rajan’s thoughts on the question of payable dividends, he is of the opinion that a special dividend would not help the government with its budgetary constraints. In reality, much of the surplus that the RBI generates comes from interest on government assets, or monetary gains it makes off other market participants. When this money is paid back to the government, the RBI in essence puts it back into the system- thus entailing no additional reserve creation.
Third, the RBI is unsatisfied with recent government proposals to set up an independent payments regulator outside the purview of the RBI. An inter-ministerial panel established to finalise the Payment and Settlement Systems Act, 2007, had recommended that the payments regulator should be an independent regulator with the chairperson appointed by the government in consultation with the RBI. In a dissent note submitted by the RBI, the RBI noted that there was no need for such an independent regulator. It cited the report by the Ratan Watal committee on digital payments, which recommended setting up of the Payments Regulatory Board (PRB) within the overall structure of the RBI.

Why is the Government miffed?

The government, however, has other reasons to wage a high-pitched war against the RBI. It seems to have developed a prima-facie dislike for the RBI, which is understandable: the RBI has railed against most of the government plans which disregarded economic sense. It complained that the RBI had kept it in the dark as far as the reforms in the approach to NPA handling was concerned. The Centre views the Prompt Corrective Action (PCA) framework by the RBI, which restricts weak banks from lending, as a key factor behind the ongoing liquidity crisis. The Reserve Bank’s circular on February 12, 2018 highlighted the importance of assets recognition as a step to mop up public banks from the bad loan mess. It scrapped all previously existing mechanisms and declared that even if the default was for a day, the defaulter must be dragged to an insolvency court and the asset must be declared as an NPA- thus ending the practice of forbearance. All these measures were taken in the public interest and in the hope for long-run gains. While the government is looking at growth, the RBI aims for stability. As was already discussed, the government also wanted the RBI to pay it higher dividends to gap its fiscal deficit, but RBI had expectedly negated the request. The government was also considerably miffed when the Reserve Bank declined the request to relax norms for lending to micro and small enterprises. This was subsequently a topic of discussion when Rajan in a note to the Parliamentary Estimates Committee pointed out that schemes like MUDRA and Kisan Credit Cards, despite being popular, could serve as potential sources of credit risks.

A supreme example of the consequence of subverting the RBI’s advice was the demonetisation debacle. On November 8th, 2016, the government announced out of the blue the scrapping of high-value currency notes in use; effectively wiping out currency worth 15.41 lakh crore from circulation. The government ignored several appeals from the-then governor of the RBI, Raghuram Rajan, to not tread on this experimental path for an economy so large in scale. This gave rise to a massive cash crunch which subsequently knocked out many small to medium scale industries which were primarily dependent on cash as a form of business. More so, this was a slap in the face for the government, too- which had claimed that the demonetisation exercise was carried out with an intent to dissolve the black money in existence, worth around 3 lakh crores. The RBI, after undertaking the tedious process to oversee the counting of uncountable number of returned notes, reported that 99.3% of the demonetised notes had found its way into the bank’s vaults, despite stringent restrictions in play. Furthermore, the government’s back-up claim of demonetisation having boosted the digital economy could not be verified in the absence of any reliable sources of data. While the benefits of demonetisation may require some pondering, its adverse impacts are clear: it hurt the economy growth rate by a staggering 1.5%.

The Way Forward

Unlike armchair politicians and commentators, the RBI cannot afford the luxury of economic inconsistency. It is often the scapegoat for under-performance, and is blamed rather unjustly for every other economic fluctuation that arises. In this environment, where the central bank has to occasionally stand firm against the highest echelons of central and state governments, its decisions to not waver from the targets of economic stability and prudence must be commended. At the same time, while the ability of the RBI to say ‘no’ in the face of adversities must be protected, it also cannot be free of all constraints and should work under a framework set by the government. In this context, certain suggestions come to my mind.

First, the responsibilities of the RBI must be clearly defined. When the responsibilities of the RBI are fuzzy, its actions can be subject to continuous questioning. Instead, if the competent authorities outline a framework within which the RBI can operate, it can steer its course consistent with those responsibilities and can be held accountable for outcomes in those fields. Inflation targets set by the government serve as a good example. Second, the freedom of the RBI to take key operational decisions from time to time is important. The RBI is tasked with the job of maintaining macroeconomic stability, and this requires the RBI to often turn down attractive proposals for the short run. With passing days, government entities are increasingly seeking oversight over various sectors of the RBI’s work. Such oversight by non-technical personnel only leads to delay in the decision making process and is not desirable. Third, and perhaps the most important of them all, the RBI must continue to fill its vacancies through clearances approved by the RBI Board and not put in place government officials who may have very little knowledge of the technicalities involved. Formulation of the Monetary Policy of India is a brilliant example of the benefits that accrue if an independent entity is allowed to deliberate on the most crucial economic policy in India. RBI, through an effective monetary policy has been able to meet the indicator targets that it had set for itself- and it is running the show by itself, through independent analysis.

Democracies thrive on the independence of regulators, but today India finds itself ruing its absence. This contrariety is at the heart of the fault line between the two parallel institutions. Truly, institutional independence lies at the heart of any liberal democracy. If we cannot protect the RBI’s independence, and other institutions of similar importance that hold the national rudders, we cannot sustain national growth for long. One can only hope for sense to prevail, and an end to the the rather unsavoury tensions that exist at present.