Jalan panel’s recommendations represent a possible silver lining

Source: By Jamal Mecklai: The Financial Express

The Jalan Committee’s recommendations on transferring a part of RBI’s “excess” capital to the government represent a possible silver lining in the thunderstorm that has been pummeling India’s economic growth. This is not only because it may assist the government in meeting this year’s fiscal deficit target, but more pertinently because it represents the first public quasi-acknowledgement by the Modi government that having experts, who have significant domain knowledge and experience, determine policy frameworks can be of huge value.

One of the loudest failures of the government, from its first election to today, has been the cavalier attitude it has shown to knowledge and experience. Senior bureaucrats were—and continue to be—transferred to completely unrelated ministries, nullifying their years, perhaps decades, of experience. As a result, we have had some incomprehensible decisions hurriedly implemented—read demonetisation—and even some extremely sound policies implemented in a haphazard and not-thought-through manner—read GST.

Even today, with the economy deep in the danger zone, policies are being put forth without adequate planning. For instance, as argued very clearly that the current proposal to immediately merge several public sector banks into one another, while sound in principle, reflects the worst possible timing, since at this time, banks need to focus primarily on sharpening—and increasing—their lending (particularly given the generous government support), instead of which several bank managements will now need to spend huge amounts of time in managing the mergers.

What the government clearly doesn’t realise is that the economy and markets are not swayed as easily as the electorate. Simply making triumphal pronouncements is not enough—the economy needs sound ideas, careful planning and meticulous implementation. The sum total impact of the government’s economic policies over the past five years is there for all to see—a sharp and continuing decline of our GDP growth rate.

Between 2014 and today, of 14 large economies, only Turkey and the UK have seen GDP growth fall more sharply than India. To be sure, there has been a modest global slowdown, but half of the countries I looked at—Brazil, France, Indonesia, Japan, Poland, Russia and the US — are reporting higher GDP growth rates than in 2014, indicating that sensible, tailored policies can keep growth ticking over even in difficult times.

The comparative story in Asia is even bleaker, with 7 of 11 Asian countries showing increased GDP growth; India’s performance is by far the worst. Even Pakistan, often dismissed as a basket case, is growing faster than we are today. It is clearly disingenuous to claim global circumstances are the main reason for the government’s failure on the economy.

It is significant that the two large countries that are faring worse than India are hobbled by negative sentiment—Turkey as a result of Erdogan’s flailing around as his imperial reign appears to be ending, and the UK, of course, because of Brexit and, now, Boris Johnson. Negative sentiment in India, too, has been spreading rapidly and is, without doubt, a significant force in the slowdown.

It is often said that acknowledging a problem is a necessary step to solving it, but, thus far at least, this government appears unable to admit failure in the smallest of issues, let alone ones as dramatic and apparently as close to its heart as economic development—remember, acche din, the target of a $ 5 trillion economy by 2024, and so on.

Of course, there is no need for loud mea culpa’s; the Jalan panel was constituted quietly in the midst of the finance ministry-RBI maelstrom. It did its work, albeit with some public acrimony, but delivered what I believe are sound results, both in terms of immediate impact as also, critically, in setting a framework for future operations.

It is another matter that the RBI board decided to push the limits of the recommendations, as one of the committee members pointed out; clearly, institutional capture, which is another structural reflection of the insecurity of the government, remains a strong agenda item.

Given that the global growth environment is also turning more difficult, the government needs to wake up and build on its lone expert-driven success. Otherwise, we may have to accept 5-5.5% as the upper bound of India’s growth, which could lead—a la Erdogan and, even, Putin—to an electoral surprise in 2024. This may turn out to be the real silver lining.