[I sat on the Prime Minister's Economic Advisory Council for a couple of years and advised Atal Bihari Vajpayee; then I resigned when I went to Stanford. After coming back, I used my freedom to criticize the government's economic policy. This column was published in Business Standard of 14 November 2000.]
The Premier’s dilemma
Early this
month the government transferred 14 secretaries. It was thoroughly and
deservedly excoriated by the press. In the damage control exercise, a Deep
Throat put out the story that the Prime Minister is concerned over the poor performance
of the economy and perplexed by disagreements amongst government economists,
and that he decided to replace the team in the finance ministry to get some
cohesiveness in policy.
It is a pretty lame
story; and for that reason it is substantially true. The Prime Minister’s
Economic Council is now two years old. Every once in a while the PM calls it
together, its members give him sage advice, in return for which he gives them
cashew nuts and tea. Much has been said, much paper has been expended; but at
the end of it, the PM remains as bemused as ever. Now he has asked the members
of the Council to speak to him with one voice, and give him the consensus of
their advice. The story of the meeting between finance ministry officials and
the Governor of Reserve Bank in his presence has also been leaked to the press;
apparently there were sharp differences between them and the Governor on
policy, and the PM was even more deeply bemused.
Since I am no longer in the Prime Minister’s Economic Council, I have no
knowledge of the precise points of difference. But the cause of the dispute
between Bimal Jalan and the sacked finance ministry officials is pretty easy to
imagine. It relates to four issues:
1.
Balance of payments: Reserve Bank makes
projections of the balance of payments; they are apparently alarming. Just why
would not be clear to mere mortals, but the reserve bureaucrats know something
that we do not. For one thing, they know how much military hardware from Russia
and France is going to cost; apparently it runs into billions. For another,
Resurgent India Bonds come up for repayment in 2003. But there is apparently
something more. It probably has something to do with foreign capital inflows.
The defaults of Essar and Spic have turned foreign lenders off Indian
companies; and if Indians themselves are not buying into Indian companies,
other than software companies, foreigners are hardly likely to do so. If they
join Bajoria and Dalmia and take over cheap Indian companies, the xenophobes
will raise a racket. Both the government’s swadeshi connections and the
industrial slowdown are bad for foreign investment. Whatever their precise
elements, the forecasts look bad.
What
can be done about it? The only thing RBI and finance ministry could agree on is
borrowing – in the form of India Millennium Deposits. These borrowings are a
racket. They are only for NRIs, so others have to pay NRIs a commission for
getting in (which is why the US has banned us from collecting the deposits
there). They are at an appreciably higher interest rate than the rate at which
NRIs can borrow, so NRIs can earn a nice little margin. Some of that margin can
be given back to those who conceive and collect these Deposits. So they are
popular amongst politicians and state bankers too. And RBI gets an accretion to
its reserves. Everyone is happy. But this is not enough in RBI’s view; more
needs to be done.
2.
Exchange rate: What could be done? Devaluation? That
would raise the price of oil. The government could not even pass on the price
increase that has occurred; it made a messy compromise. A further price
increase would mean a bigger deficit on Oil Price Equalization Account, more
trouble with more Mamtas.
3.
Interest rates: After dipping briefly in 1997 and
1998, interest rates on government borrowings are pretty close to what they
were in the early 1990s. Their cost pinches more because in the meanwhile, the
government has added a couple of trillion Rupees to its debt. Government’s
borrowing rates push up the rates at which banks and FIs lend to industry, so
industry is complaining. The finance ministry would like RBI to reduce interest
rates. Now that the central government does not borrow on the SLR, the banks
cannot be forced to take its loans. RBI finds it difficult to place the increasing
volume of loans even at the current interest rates; how can it force the banks
to take the bonds at even lower rates? The finance ministry thinks it can; the
governor thinks it cannot. Besides, he is aware that although he has strangled
the foreign exchange market, leads and lags in payments for exports and imports
can cause a run on his exchange reserves; he needs to keep domestic interest
rates high to persuade traders to keep their money in India.
4.
The budget: The Governor must have told the finance
ministry that the solution lay in its lap: it must borrow less. Then he could
bring down interest rates. He would have pointed out that revenues had been
buoyant this year despite the slowdown, but that the government had managed to
blow them up by spending on arms and what else. In the circumstances, it should
reduce expenditure, raise taxes or both in the next budget.
These are
the controversies to settle which the Prime Minister sacked the top brass in
the finance ministry. Will he have settled them thereby? Will the next lot
agree with the Governor and bite the bullet? I doubt it. What I am sure of is
that it will fully display its inexperience and opportunism in the next budget.
It will not touch government expenditure, whence politicians derive their sustenance.
It will raise import duties; from the Swadeshi xenophobes to the FICCI-CII
types, every lobby loves this, whatever its effect on exports. It will raid the
cash reserves of public enterprises to fill its borrowing requirements. But to
cure the economic slowdown that the PM brought it in to do? It would not even
know where to start.
