RBI seems to be of the view that the Covid-19 economic emergency will be a transient phenomenon. No crisis measures appear to have been taken by the RBI to meet the effects of the worldwide Covid-19 supply-demand shock on India.
NEW DELHI: The emergency caused by the spread of the novel coronavirus (Covid-19) to India needs to result in the introduction of transformational reforms in the economy, as took place in 1992 because of the precarious condition of the country at the time when P.V. Narasimha Rao took over as Prime Minister. The societal aftershocks of the Citizenship Amendment Act (CAA) and the visible slump in “animal spirits” within the economy indicate the need for both policy as well as personnel changes that need to be undertaken by Prime Minister Narendra Modi for the country to get back to the growth trajectory that it was in before the assumption of full control by 10 Janpath over 7 RCR following the 2009 repeat of the UPA’s 2004 national election win. Such steps are urgently needed in view of the fact that the onset of Covid-19 in an increasing number of countries across the world is creating a classic “Demand and Supply Shock”. This threatens to tip the international economy into systemic recession. Ironically, the greatest impact of Covid-19 is being felt in the developed world, as well as in those sectors located within developing countries that are more globally competitive than the rest of the economy. This is a consequence of the dominance of China in both global demand chains through its purchases of natural resources, services, manufactures and consumables from countries across the world, most prominently in North America, Europe and the Indo-Pacific. The recent sharp reduction in imports by the People’s Republic of China is leading to a fall in overall consumer demand in several engines of growth of the world economy, including through steep falls in the prices of petroleum and other feedstocks. In the case of supply, whether it be Japan, India, the EU or the US, a substantial segment of the supply chain in manufacturing is based in China, and much of this has been temporarily brought offline by the unprecedented emergency responses of President Xi Jinping since the third week of January 2020 to the coronavirus outbreak after it had made its first appearance in the country months before. The Covid-19 global emergency demonstrates the danger in major economies allowing their supply chains to be as dependent on a single country the way much of global manufacturing is on China. Despite this, the downturn in growth caused by the Covid-19 demand-supply shock means that most corporates will find it difficult to build up substitute manufacturing capacities in locations other than China at speed. Aware of the danger that considerable manufacturing capacity may migrate from China and thereby impact the employment outlook, President Xi Jinping has ordered manufacturing units to restart operations, calculating that the risk of some infections within the workforce is less than the damage that would be caused to the Chinese economy through large-scale migration of manufacturing capacity to Taiwan, Vietnam, the Philippines and to an extent India.
MOVE TOWARDS NEGATIVE INTEREST RATES
Inadvertently, the US Federal Reserve Board indicated the depth of the crisis being faced by the global economy by its unscheduled decision to make an emergency cut lowering the already historically low level of interest rates by 50 basis points for the first time since the 2008 financial meltdown. This was taken by investors as a sign of panic, which is why US stock prices fell rather than rose immediately after the interest rate cut. Over the past years of being on the edge of a global recession, central bankers have ensured that interest rates in the developed world have been lowered to levels not seen during the previous millennium. The Federal Reserve Board realistically has about three more rate cuts left in its quiver, after which it will need to impose negative interest rates, thereby sending the banking sector in the world’s largest economy into a tailspin, once depositors find out that they need to pay interest (howsoever small) to a bank when they put their savings in it, rather than have the sum earning interest for them. The EU and Japan are also near crossing the borderline into a regime of negative interest rates, so deep have been interest rate cuts by the central banks located there. In contrast, despite the Covid-19 situation, the Reserve Bank of India seems to be of the view that the Covid-19 economic emergency will be a transient phenomenon, as no crisis measures appear to have been taken by the RBI to meet the effects of the worldwide Covid-19 Supply-Demand shock on India. Surprisingly, the RBI is yet to signal that the panic fall now being witnessed in the value of the rupee to a historical low has even merited its attention, much less action. This needs to be more than reassuring words spoken to halt the dive in the value of the rupee, which is now the worst performing currency in the Indo-Pacific along with the sanctions-hit Iranian rial. Such lack of any high octane response is in contrast to the central banks in other major economies. It may be added that a similar belief (that the economic effects of the Covid-19 pandemic on the Indian economy will be shallow and transient) seems to have taken root within the Finance Ministry as well. Thus far, there does not seem to be much in the way of policy barriers to the Covid-19 shock being set up by that ministry, which is next only to the Prime Minister’s Office in its potential to determine the course of the economy. Prime Minister Narendra Modi chose Nirmala Sitaraman as Finance Minister, after having studied her performance first as Commerce Minister and later as Defence Minister.
MODI’S MANY INITIATIVES
Those who have been studying policies adopted by Narendra Damodardas Modi believe that from the start of his first term in office on 26 May 2014, the Prime Minister put as priorities (a) overall economic development, (b) youth empowerment and (c) a safety net for the needy. Much has been done in all three spheres, especially where civil society has been roped into service, as for example with the Ujjwala scheme. However, as the relatively thin layer of administrative talent in his government has yet to be added on to through lateral entry of domain specialists and performance-oriented ( rather than procedure-obsessed) practitioners from the private sector, thus far the overall strike rate has not been of the level expected from a Modi government. A higher success rate would be achievable, were the HR managers and head hunters in the system to give less attention to pushing into key positions individuals that are part of the more influential durbars dotting the Lutyens Zone. Instead, they need to prioritise talent over relationships and make their selections with an absence of the personal bias that is universal in the Lutyens Zone, which still dominates in the number of entrants to high-level positions within the current establishment. Even investigative agencies are sometimes pressed into service to give misleading positive reports about dubious candidates that the Lutyens Zone favours, while the preparation of fake dossiers on inconvenient names has been developed into a science by those in the agencies eager to do the bidding of influential officials, businesspersons and politicians seeking to exclude those who are not part of the daily durbar of Lutyens potentates. Rather than spend time working in a productive manner, attendance at such durbars is not just the best way to advancement, but, in many cases, the only way to career advancement since the dawn of the “Overt Nehruvian Era” in the 1950s. This period may be distinguished from the “Covert Nehruvian Era”, where much the same interests as promoted by that cohort have been pursued, although of course not openly acknowledged. The foundation of policies designed to favour such interests is a continuation of the vice-like grip of the Estates of Governance over both the economy as well as the society of the country. Barring perhaps a few hours in the quiet of the bedroom each night, there is little in India that is outside the attention and the intervention of one or another of the Estates of Governance. It is noteworthy that the First Amendment to the US Constitution added to the rights of ordinary citizens, while the First Amendment to the Constitution of India diluted the Fundamental Rights that formed the core of the constitutional matrix gifted to the Republic of India by the Constituent Assembly.
BOLD STEPS TAKEN QUIETLY
The good news is that the very first weeks of Modi 2.0 have seen several initiatives which have been taken to reduce the chokehold of the colonial system of governance on elements of society and the economy. Examples:
(1) PM Modi has sought to quicken the pace of induction of domain specialists into the administration, despite this move facing headwinds from traditionalists designed to ensure that the new inductees only get placed in positions that are absent genuine influence. The intention of the Lutyens Zone traditionalists is to reduce the domain specialist inductees to the level of consultants, rather than empower and task them with operational responsibilities.
(2) The Prime Minister has made moves towards the scrapping of the Sonia-Sibal-Chidambaram laws and regulations that made it child’s play for almost any official to arrest almost any citizen on a multiplicity of grounds. As a consequence, any position of responsibility (such as being a company director) has become a form of Russian roulette, where the destruction of a life and career can take place because of accidents taking place over issues with which the individual concerned has had no real involvement. The Lutyens Zone is fighting hard against necessary dilutions in draconian laws and regulations, claiming that such moves would promote graft and incompetence, despite both being in ample abundance precisely because of regressive laws and regulations handed over to officials, many of whom are less than honest.
5G telecom will play an important role in modernising India through empowering citizens. More and more services need to come into the control of the individual via the smartphone. It may therefore be worthwhile to look around at the various 5G systems that are in process of development, and inviting global tenders that include a timetable and road map for going online. This would ensure that the 5G network of the country not be the monopoly of any single player but gets shared with at least three and preferably five major players, given the size of the market in India. It is a symptom of the malaise that has afflicted innovation in India that Vietnam has rolled out an indigenous 5G system, while India has not. Over the decades, foreign competitors have become proficient in using systemic roadblocks within India to slow down and to stop domestic competition, which is why so many migrate to other countries with their innovations, because of the ease with which they can be derailed in India by hyper-complex procedures and those in charge of enforcing them. What is needed is more sandbox style regulation, where innovators and entrepreneurs are free to take decisions without having to get permission from official agencies, but who need to keep the agencies informed of their activities. The agencies can intervene where needed, but such interventions would then not be the rule but the exception. Further, they would be shown online, so that the procedure is transparent.
CRYPTO-CURRENCY BAN ILLOGICAL
An example of the manner in which the bureaucracy in India has sought to retain control over processes even at the cost of the country’s future was the 2018 decision of the RBI to ban crypto-currencies, now overturned by the Supreme Court. The RBI failed to accept that the 21st century is no longer the age of the pigeon telegraph but that of the internet. Crypto-currency is merely a sequence of random numbers, and as such impossible to eliminate. What is needed is to create a “sandbox style” reporting and regulatory structure for them, so that millions of Indians can join in the expanding world of crypto-currency rather than be shut out because of defective policy. The RBI needs to factor in the fact that the era when central banks could tightly control instruments of exchange is drawing to a close. The post-Gold Standard era that began in 1971 is nearing its end, and from now onwards, the power of traditional central banks is going to diminish, just as Chief of Army Staff M.M. Naravane pointed out that battle tanks and fighter jets will soon belong to museums rather than be useful in the field of battle, where drones, missiles and cybertech are taking over. PM Modi once called for “minimum government”, and hopefully he will be able to overcome those in his own establishment who are seeking to subvert his policy.
POLICY STABILITY NEEDED IN TAXES
Ever since the RBI and North Block mishandled PM Modi’s 2016 replacement of Rs 1,000 notes with Rs 2,000 notes and changed the design of Rs 500 notes, overall investor confidence in policy stability has been lower than necessary for fast growth. As much as rates should be reasonable rather than absurd (as in the case of some of the GST rates), it is important that there be policy stability in both direct and indirect taxes so that HNIs and corporates are enabled to plan costs and profits better. A similar stability in customs duty needs to be ensured, which is very possible for the present PM given the stability of public support to Narendra Modi. Foreign funds should not be allowed to continue their grip over North Block so that they can continue with policies which make Indian assets ever cheaper for those with foreign exchange and reduce the value of the rupee steadily. Speculators are confident that North Block and the RBI favour a lower rupee, hence they continue battering the currency. This happens despite a higher rupee being best, as this allows FPIs more profitability, besides allowing corporate debtors to pay less than if the rupee continues to be devalued, as is happening now. Imports into India are mostly inelastic (oil, telegoods, coal and gas being examples) and hence a higher rupee would benefit the economy. As for exporters, a lower rupee does not seem to have assisted them at all, as countries where currencies are appreciating are doing far better in exports than India. Further, lower interest rates are needed, so as to lower the cost of capital. In the case of GST, the system should be so simplified that a battery of chartered accountants are no longer needed to file returns. There should not just be Saral direct taxes but Saral GST as well, with forms so simple that they can be filled in by the taxpayer without needing recourse to professional assistance, as has become inevitable these days.
CATCH THE BIG FISH
In India, while some “flies” (small or medium depredators) seem to be getting caught, the “tigers” (mega depredators) seem to be laughing all the way to the Bahamas. Financial enforcement agencies need to use “sniper rifles” to go after a few Big Fish rather than continue to use AK-47s to spray prosecutorial bullets all around. Continuing with UPA-era tax terrorism has caused substantial collateral damage to the economy. Only VVIP depredators need to be given special attention, rather than allowed to roam free across the world, spending the money they looted from the public. At the same time, individuals such as bankers whose error was to obey a call from the Finance Minister of the time need to be incentivised to turn approvers. They should be given full pardons if they assist in bringing VVIPS to book. Thus far, only one VVIP (P. Chidambaram) has had to suffer incarceration, that too over a much smaller matter than others with which he is involved. Chidambaram’s network of facilitators needs to be identified, and those still in high positions need to be removed. The same goes for other VVIPs found to abuse the public trust. India has to be made dangerous for the VVIP depredator, and modern technology can assist in such a task. Today, the economy is facing a situation that in many respects is not unlike that of 1992. Just as China under Deng in 1982 and India under Narasimha Rao in 1992 launched transformative economic change, a similar rejuvenation needs to take place during Modi 2.0. The Covid-19 crisis has presented an opportunity for the Government of India to show that it is able and willing to replace the models and methods of the 19th and 20th centuries with those of the 21st.