By Archit Jain
In a reassuring assertion of the Reserve Bank of Indias autonomy after the demonetisation fiasco in which many commentators criticised the Central Bank for unquestioningly bowing to crony interests, Governor Urjit Patel warned the government against giving away liberal sops in the upcoming budget. This is timely advice given that the Prime Minister very recently announced interest rate subventions on small home loans and a doubling of the credit guarantee limit for small businesses to Rs 2 crores. With assembly elections in five states following soon after the union budget declaration, further concessions are likely.
The illusion of attracting foreign investment
Patel maintained that while it is quick and easy to fritter away gains in macroeconomic stability, it is hard and slow to regain them. The instability he was referring to is a further increase in Indias government debt to GDP ratio. It is already among the highest in the group of G-20 countries, according to the International Monetary Fund.
A high ratio bodes poorly for the countrys prospects of getting a credit rating upgrade by international agencies such as Moodys or S&P. Currently, Moodys rates India as Baa3, the lowest investor-grade rating and S&P is no more generous with a BBB-minus.
These are wakeup calls for the current administration, which has displayed unwavering enthusiasm in its attempts to attract foreign investment.
An unsound agenda
In his address, which took place at the Vibrant Gujarat Summit in Gandhinagar, Patel went on to say that guarantees of the kind promised this New Years Eve have limited utility in solving sector-specific issues. For small scale enterprises, nonpecuniary and transaction costs related to clearances, inspections, and the taxation bureaucracy are more important. This is not to discount the importance of public spending in driving economic growth.
Patel warned the government against giving away liberal sops in the upcoming budget | Picture Courtesy – Deccan ChronicleIndeed, structural reforms and a reorientation of government expenditure towards public infrastructure are imperative for sustainable growth. What is less helpful is an abdication of responsibility as the primary provider in these sectors and a simultaneous tendency to preempt resources from future generations through debt-backed consumption.
Short-term gains, long-term pains
An unthinking disbursal of guarantees and subventions to appease an anguished electorate has other problems too. It prevents an optimal allocation of limited government funds. It also sets off self-fulfilling inflationary expectations and increases moral hazard. But it serves its original purpose impeccably: it is a tried-and-tested tool for short-sighted political gains.
In fact, given this governments track record, it would be surprising if it does not yield to its temptation of loosening the purse strings on February 1.
Democracy in peril
[su_pullquote align=”right”]When a government systematically shuns expert opinion and does only what is politically expedient, we all lose.[/su_pullquote]
Ultimately, the dichotomy between the aspirations of a poor nation and those of its elite political class is worrying. It undermines democracy and its basic tenets. A healthy flow of ideas and perspectives keeps a democracy alive. The annual union budget is just the opportunity to exploit this flow. When a government systematically shuns expert opinion and does only what is politically expedient, we all lose.