Time for political courage implies rbi

Time for political courage implies rbi

India needs a shot of fiscal expansion, right now.

Is it a soft patch, a cyclical downswing or a structural slowdown, asks RBI in its annual report, with reference to current economic conditions. It answers, with great clarity, that it is all three: a soft patch mutating into a cyclical downswing, with several structural problems remaining to be addressed. Central-bankspeak has a reputation for being cryptic and the Reserve Bank is excelling itself in this tradition. But India’s economic agents, facing layoffs and slowing revenues, even as they have loans to service, would prefer clarity over political correctness. The RBI recommends fiscal readjustments to boost growth without accumulating public debt, while bringing about improvement in spending for infrastructure and the social sector.

What precisely does this mean? That the government should stop paying interest on its debt, or paying salaries? These are not viable options, of course. That leaves pruning subsidies of various kinds, including welfare payments that do not boost the social sector. If the government announces austerity for itself, it could eke out some extra rupees to spend on investment, which RBI correctly identifies as what would reverse the downswing. But what RBI and other fiscal fundamentalists have so far refused to acknowledge is that a severe demand slowdown across sectors calls for expanding the fiscal deficit to push up investment in infrastructure. Unless private investment roars back into action and starts competing for funds with the government, there is little risk of either interest rates going up or of docile inflation suddenly turning aggressive. To put it bluntly, the current situation calls for fiscal expansion, along with measures to revive private investment in infrastructure. That would call for some structural reform, beyond debt market measures.

India cannot progress as a nation with a stricken power sector. And the power sector cannot get energised without a cultural change in the expectation of free power. Towns need to be built and farm land released for them. These call for political courage, most of all.