One of the interesting aspects of the Indian economy is how much of the policy debate gets carried out in the media. In keeping with Amartya Sen’s characterization of the “argumentative Indian,” everyone has an opinion and expresses it fearlessly. Here is my opinion of the opinions.
The Prime Minister and members of the Planning Commission have made statements in the last few days that suggest a fiscal stimulus could be in the offing, in the form of spending on infrastructure projects. Interestingly, Commerce Minister Kamal Nath went much further, and announced a specific number, saying that the fiscal stimulus would be Rs. 250 billion over the next six months. With budgeted central government expenditure for 2008-09 at Rs. 7500 billion, that works out to about a 3 percent increase in central government expenditure. The budget estimate of the central fiscal deficit was about Rs. 1300 billion, or 2.5 percent of GDP, so if nothing else changes, the stimulus would add about 0.5 percentage points to the fiscal deficit. Of course, some of the increased expenditure might lead to greater tax revenue, and reduce the hit to the deficit. Nath stated that the stimulus would have to be done without any adverse impact on the deficit, but I have no idea how that would be accomplished, let alone the fact that the main point of the stimulus is to increase net government expenditure. (I realize that simple Keynesian models have balanced budget multipliers, but I doubt if that is what Nath was thinking.) I still think that still more loosening of monetary policy and further economic reform (see my last post) should come before a fiscal stimulus is tried.
In the context of reform, it seems to me rather against the spirit of economic reform for the government to be telling industry not to lay off people. The Prime Minister has been arguing “knee-jerk” reactions toward large layoffs can trigger a downward spiral. There is certainly a confidence-boosting effort required, but rather than tell corporations that it is their societal obligation to keep people employed, maybe the government should take steps to make employing people easier – one could argue that policies to promote labor market flexibility would actually do more for employment than exhortation. Maybe the fiscal stimulus could take the form of tax breaks for firms that maintain employment. In this context, Kamal Nath was again less nuanced in his statement, which was: “Employees on the roll must be retained.” He seems to miss the point when he says that firms should not fire people to boost profits – the issue may be that of survival, or of global competitiveness for these firms, not one of boosting profits.
In a report from a major banking conference, I found some statements that I consider disturbing or bizarre. The head of the State Bank of India, the country’s largest bank, apparently predicted a 50% fall in housing prices, and said “If that happens, it’s good news for the Indian banking system as NPAs would reduce and new business would fall-in.” What? First, I don’t understand how a realty price collapse of that magnitude helps, and secondly, I think that the head of the largest public sector bank has no business making such a prediction – where’s the confidence boosting in that?! The same person also said that inflation would only fall to 9 percent by March 2009, not to 7 percent. Recently, inflation has been essentially zero (actually, even a little below zero, in month-to-month figures). The WPI on April 19, 2008 was about 227. On October 18, 2008, or six months later, it was about 238, about a 5 percent increase, or about 10 percent at an annual rate. For a 9 percent year-on-year rate in April 2009, the WPI would have to go up to about 247, or about 8 percent annualized over the next six months. Makes no sense to me! I would bet on a figure more like 7 percent year-on-year, which would imply about 4-5 percent annualized inflation over the next six months.
Another bank CEO advocated “a dire need to attract sovereign wealth funds’ investments [to] India.” Why in the world is that a good idea? Should India rely on, or even try to attract, government-controlled, possibly politically-motivated sources of funds? In fairness, other bankers had more sensible things to say, including the need for new capital in the Indian banking system to sustain long term growth, and the continuing concerns with liquidity and risk management. Those are together the nub of the problem, and that is where Indian policymakers should focus maximal attention.
Finally, readers may enjoy looking at the results of the RBI’s survey of professional forecasters, conducted in late September, and see how much they’ve already gotten wrong. They are not policymakers, but it is interesting that the RBI seems to report the results of the survey without any commentary of its own – it might at least point out where reality has already deviated from the forecasts. The world is moving rather quickly these days!