Blame honesty deficit of macro managers; not lack of expertise

Humility died many months ago. The overconfidence of the UPA government and the resultant arrogance among few of its ministers was immediately absorbed by India’s macroeconomic managers — the Planning Commission, the bureaucracy, the finance ministry. The sole exception: C Rangarajan, chairman of 

Prime Minister’s Economic Advisory Council, who stayed vocally alert to contrary signals, even while toeing the line.

Honesty remains in the ICU for the government as well as its macroeconomic managers. Over the past few years, as they fought their bloodiest battle against a party-neutral political enemy — inflation — all voices from Planning Commission to North Block converged on the following line: “Inflation will come down to 5-6% in the next three months.” Until last month, these series of three months seemed from a different calendar. Again, the sole exception has been Rangarajan, who always prefixed it with “we hope”.

Today, despite staring at a 5.1% contraction in factory output, 6% contraction in manufacturing, 7.2% contraction in mining and a shocking 25.5% (repeat 25.5%) contraction in capital goods, we see neither humility nor honesty. Montek Singh Ahluwalia, for instance, wants us to wait for the third quarter GDP numbers. And this time even Rangarajan is surprised — he didn’t expect the fall to be so steep. Really?

To humility and honesty, we need to add urgency. It’s time the government said the following. One, inflation is a global problem and India is vulnerable to those trends, particularly in food. On food, pressure is easing. After rising to its all-time high in December 2010, the food index dropped to an 11-month low in October, according to Food and Agriculture Organisation of the United Nations. Mirroring that trend, India’s food inflation fell to 6.6% last week.

Two, it needs to admit that it has allowed the blunt tool of monetary policy to increase interest rate to choke demand because it is afraid to move on policy side reforms. Unfortunately, high interest rates have done nothing to curb speculative real estate demand — growth of home loans jumped to 15.2% between March and September 2011 from 10.4% in the previous year. Instead, what this has done is to kill industrial demand. Essentially, the government has used RBI’s autonomy — very important — to help it get away with industrial murder.

Large companies have access to global capital, currently available for 2-4 percentage points over the London Inter Bank Offered Rate, or at around 6-8%. That can get us the finance needed to deliver economic growth for G20 discussions. But what we need is employment growth and that comes from smaller companies, which have to borrow money at 13-15% and higher. You don’t need experts to tell you that it makes no sense to borrow money and invest it in Indian industry to get a decent return.

The duo of high inflation and high interest rates is a double whammy that has pushed the contraction in capital goods by a steep 25.5%. This means, future investments are not going to happen as planned. When those investments are held back, the people needed to work the machines — the capital goods — will not find avenues to work. Jobs growth, as a result, will slow down. But this not new. Our highly-educated, highly-trained, highly-articulate macroeconomic managers know this and stay frozen in time and rate.

Above them, the reforms needed to help speed up a slowing and failing system into action are missing for want of political alignment. Fine, but can we move further on reducing the frictions like corruption, excessive bureaucracy, out-of-tune laws, rules and regulations for businesses to set up plants, introduce products and create jobs? That would need a dose of introspection, an antibiotic against arrogance, and pills of honesty. But for that to happen, we’ll have to wait for these smoke signals to asphyxiate us.

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