Is RBI Filling Macro Management Vacuum?

Arun Jaitley

In escalating trade and currency wars, there is no macroeconomic messaging from FM


Whether it is UPA or NDA rule, the one thing common is how global economic factors profoundly impact domestic macroeconomic management. Therefore, finance minister Arun Jaitley must not overstate the case that the economy produced “less than modest growth” in the last four years but the “quality” of macroeconomic management was better than seen during the UPA tenure.

The fact is exports, agriculture, industrial production, private investment and bank credit have all shown sub-par growth over the last four years. There is no getting away from this reality, whatever spin the finance minister may give.

Jaitley’s argument itself sounded a bit like sour grapes for it was made in the context of a National Statistical Commission study that released the long-awaited GDP back series data, which showed the UPA governments actually produced even higher growth during its ten years, with over 10 percent GDP growth for two of those years.

The data released by the National Statistical Commission was hastily declared a “draft report”, and not the official view of the government, after BJP higher-ups realised that the NDA-II government was being shown in poorer light via-à-vis the UPA on key economic performance metrics.

Jaitley’s claim of better macroeconomic management also rests on thin ice because the fact is global factors actually lay the foundation of domestic macroeconomic management. The RBI governor made a telling comment recently after he raised interest rates for the second time in six months. He said the global economy has already experienced trade skirmishes followed by a trade war, and now we are seeing the beginnings of a currency war. Then he obliquely suggested that all India can do is sit tight and fasten its seat belt.

In fact, the RBI’s decision to hike interest rate twice is largely aimed at defending the rupee against a potential attack on emerging market currencies caused by the twin events of a trade war-led weakening of the Chinese economy and currency combined with the US dollar strengthening via increased interest rates by the Federal Reserve.

The RBI governor knows this only too well. Arun Jaitley will also do well to take these factors into account before making sanguine pronouncements on NDA’s macroeconomic management.

The central bank is far more realistic in its assessment of the situation. Its two-stroke repo rate increase is also indicative of the fact that it is not entirely satisfied with the Centre’s fiscal management and wants to create a bulwark against possible slippage. As The Wire recently reported, the national auditor has pointed to a gap of over Rs 50,000 crore in the actual fiscal gap versus the numbers shown by finance ministry in the budget documents for 2015-16.

Besides this, the Centre has been merrily dipping deep into the reserves of cash-rich PSUs like ONGC, NTPC and even LIC to meet its expenditure gap. This amounts to merely shifting borrowings from government books to the balance sheet of these PSUs. This is pure window dressing. The RBI does not particularly regard these mechanisms as constituting a structural reduction in fiscal deficit.

In fact, of late, the bulk of macroeconomic management has fallen on the shoulders of RBI as there was little clarity on who ran the finance ministry. After chief economic adviser Arvind Subramanian announced his departure, there was even less clarity on who was supposed to communicate macro policy from New Delhi. There was a veritable vacuum at a time when global trade and currency wars were escalating.

The RBI, therefore, stepped into this vacuum and has taken charge. There has been virtually no macroeconomic messaging coming from the finance ministry.

Recently, as the exchange rate of the rupee tumbled beyond 70, department of economics affairs secretary Subhash Chandra Garg was quoted as saying that the falling rupee was not a concern for the government – even if it touched Rs 80 to the dollar – as long as other currencies are falling in the same range.

This was disastrous communication on something as sensitive as the rupee’s exchange rate. You are effectively signalling to the global market that India is willing to see the rupee weakening to even Rs 80 to a dollar if other currencies fall in that range. This is tantamount to saying if China devalued its currency by 15 percent to 20 percent in order to neutralise the higher tariffs imposed on it by the US, India will also do the same. Making such an open admission even before an event had occurred shows lack of maturity.

Former chief economic adviser Arvind Virmani, who worked with both NDA and UPA, tells me that never before had either RBI or finance ministry spoken of a specific figure as an appropriate exchange rate. The default position on currency management is always that the exchange rate is market-determined and the RBI intervenes only to check volatility.

However, in the current regime all manner of statements are being made by officials without realising their market sensitivity. Today, global currency speculators are convinced that India is ready to see the rupee depreciate much more in the coming months. Jaitley also said India has enough reserves to defend the rupee. That was an utterly defensive statement because when you have enough reserves you don’t boast about it and instead let your actions speak.

Arun Jaitley, who is back in the saddle after several months of medical leave, must understand that proper communication and intelligent signalling of policy is one of the most important parts of macroeconomic management.

His government must get over the NDA versus UPA bickering and focus on the gathering clouds of macroeconomic risks on the global horizon. This is no time for scoring petty brownie points over the performance of past regimes.