Suman Bery: Anchoring growth expectations

What opportunities to maintain growth does the present crisis provide the government.

After a long period in a confusing fog, the economic landscape has resolved itself into the wintry clarity of recession abroad and a growth slowdown domestically. While the Obama victory provided an important boost to sentiment, the stunning reversal on Wednesday, by Treasury Secretary Paulson, on the use of the $700 billion authorised by the US Congress, suggests that strong aftershocks continue at the epicentre of the global financial crisis.

Given the improvisation and pragmatism displayed by the authorities in the West, it would be natural for our own policy-makers to assume that anything goes, and that no rules apply. This would be a mistake, for at least a couple of reasons.

First, as I have argued in earlier columns, the striking aspect of India’s response to the 1991 crisis was that it was used as an opportunity to articulate a coherent vision of the economy, a vision which guided us for almost a decade, even if we seem occasionally to have lost the plot in recent years. India is fortunate to have a team of respected, experienced economic managers at the helm who have seen this movie before. These managers also have much greater freedom of action now because of the change in the composition of Parliamentary support on which they rely.

Second, largely as a result of those earlier efforts, the economy is much more integrated globally than it used to be. This both enhances the pay-off to clear communication, and also raises the penalties associated with missteps. Pragmatism in the absence of a clearly communicated framework is a risky strategy. Yet, given the enormous uncertainties in the present environment, such an articulation must simultaneously be clear and reassuring, while retaining operational flexibility. As in 1991, it needs to transcend the remit of individual ministries to provide a coherent view of coordinated, purposive and measured action across government. While coalition politics will continue to impose its own constraints, in addition to the Prime Minister, the Congress party has direct control over the key portfolios of Finance, Commerce, as well as Oil and Natural Gas, not to mention External Affairs and the Planning Commission. Given appropriate political direction, this circumstance ought to facilitate consistency of policy across a broad front of economic policy.

Such a framework would ideally blend the short-term with the medium-term, the financial with the real, the local with the global, and growth with social protection. Several of these elements build upon points already made by the Prime Minister in various settings over the last couple of weeks. Accordingly, one opportunity to lay out this framework would be when the Prime Minister returns from this weekend’s G-20 meetings in Washington. The statement could stress the following points:

 

Maintaining India’s rapid growth is both necessary and feasible. It is necessary for both domestic and global reasons. The domestic reasons are self-evident and include provision of employment, and creation of fiscal space for necessary revenue and capital expenditure. Global reasons include both the need to compensate for declining OECD (and oil-exporter) demand, and to maintain progress toward the Millenium Development Goals (MDGs). It is feasible because the inflationary pressures, domestic and foreign, that had built up in the world economy have largely eased. Returning the economy to a high, sustainable growth trajectory will remain the core objective of government policy. It should be the goal of the international official financial system to support the maintenance of this growth with relatively unconditional finance, to relax balance of payments constraints.

 

Recent fast growth has been associated with a large, welcome increase in corporate investment, both by the public and private sectors. This is the component of final demand that is most at risk at present. A core objective of government policy would be to take measures (particularly in the regulatory area) which have been identified as impediments to investment.

 

India has benefited substantially from greater integration with the world economy, both trade and finance, through faster growth and enhanced productivity. This commitment remains unchanged, even though the present crisis is in many ways unprecedented in both origin and scale.n India’s infrastructure needs are massive and are relatively unaffected by the present slowdown in global growth. For reasons of both financing and efficient operation, India remains committed to responsible private sector participation in infrastructure by domestic and foreign players, through debt and equity participation. To keep the programme on track, special efforts will be made on issues of economic regulation of infrastructure sectors and on reform of the financial sector, particularly in stimulating the development of the corporate debt market.

 

India has a long history of responsible financial management, characterised by prompt payment of central public debt and availability of foreign exchange (at market exchange rates) to permit orderly external transactions. There is no reason whatsoever to expect that there would be any interruption in payments.

 

India’s financial system is well-capitalised, conservatively managed and only indirectly exposed to global markets (primarily through overseas branches and subsidiaries, and through the overseas exposure of corporates). In addition balance sheet expansion of the banks, though rapid in recent years, has been largely insulated from recent surges of capital by increases in cash ratios and by the issue of special bonds. It is therefore relatively easy to accommodate the current outflow of capital without shrinking bank balance sheets.

 

India’s corporate sector has not, in general, been over-leveraged; certain sectors, such as real estate, may be an exception. While some companies will certainly face distress, mergers and acquisitions would be the normal route to resolution rather than government bail-outs. Improvements in the bankruptcy code (as pointed out by the recent Rajan Committee report) should be put on a fast track.

 

Despite the government’s best efforts, certain sectors, notably small and medium exporters and construction will definitely suffer some adverse impact of unknown duration (as recently described in the news pages of this paper). To my knowledge more has been done to provide a safety net for rural households (through the National Rural Guarantee Employment Act) than for unorganised workers, despite the considerable efforts of the National Commission on the Unorganised Sector. It would be desirable for government to put in place a statistically valid tracking system to document what is happening, as the basis for sound policy.

The author is Director-General, NCAER, New Delhi. Views are personal