Well-thought-out stimulus is the need of the hour

India may be chasing a $5 trillion economy dream, but it lags not only behind China but now also behind Philippines and Indonesia, in real GDP growth rate. The slowdown appears broad-based. Monetary policy is not enough to handle the current circumstances and fiscal policy needs major focus.

Nine out of 10 analysts, polled by DH, are of the view that “helicopter money” may help in regenerating demand and pump-priming investment, both of which are muted. Helicopter money or helicopter drop is an expansionary fiscal policy that is financed by increased money supply.

It could either be through enhanced spending or deep tax cuts. But to achieve that, the government and the Reserve Bank of India need to work in tandem.

Earlier this week, the RBI, in a long and explanatory annual report, said that the country is going through a cyclical slowdown. The hint was that the government should take counter-cyclical measures to arrest the slump. In other words, it should increase loan disbursement at a faster rate to perk up demand from the consumers and investment by the companies.

The banks have a major role at this point in time. The government needs to encourage them and stand behind them so that they do not hold back lending and credit growth pick up.

This was the RBI’s message when it said the growth slowdown was ‘cyclical than structural’ at the moment.

However, what the government did, was the opposite. It announced bank mergers out of the blue. There was no immediate plan for that. Finance Minister Nirmala Sitharaman had said last week that she would come with measures to give a boost to the realty sector so that housing sales pick up. Apparently, the plan was changed at the last moment when the government came to know that the GDP growth for April-June quarter was much below the street expectation and it needed to announce bigger reforms to dwarf the impact of 5% economic growth.

The bank merger was much awaited and certainly caught attention but, in the process, the banks deviated from the current task of expediting credit disbursement, a counter-cyclical measure, that the RBI was perhaps talking about.

Experiences in the past have shown that it takes about 12 to 18 months for a merged bank to stabilise.

The process of human and technology transfer itself takes a lot of time and resources of the banks. They are hardly able to do their core business during that time, which means the focus of at least 10 banks in line for a merger, would shift from lending to amalgamation for the next one-and-a-half years. This is not the reform that is the need of the hour.

Global headwinds

Moreover, the government also appears to be in denial mode on the slowdown. The Chief Economic Adviser, who was fielded to answer questions after the GDP numbers were out, said he saw some green shoots of recovery in several sectors. According to him, global headwinds and trade war were largely responsible for economic woes.

India’s growth rate at 5% starkly reminds of the crisis in 2013, when the US Federal Reserve Chair, Ben Bernanke announced the future tapering of quantitative easing that it followed since the days of the global financial crisis. Money and investments flowed from emerging markets to the US.

In line with other emerging markets, India too slowed, weighed down by vulnerable macros. But, of course, the macro-economic parameters are much stronger now. Inflation and fiscal deficit are under control. Oil prices are range-bound despite geopolitical tensions.

The monsoon has been by and large normal and the RBI has ensured monetary policy does the heavy lifting. But, the situation on the foreign exchange reserve side may not be as healthy as it looks like.

Presently, the foreign exchange reserves of close to $430 billion are significantly lower than the country’s total external liabilities, which are to the tune of $1 trillion. They are even lower than the country’s total external debt of $500 billion.

The position is in contrast to those days when India’s foreign exchange reserves, at $310 billion, exceeded the then total external debt of about $224 billion and provided a much larger cover to total external liabilities that amounted to about $426 billion.

In other words, external risks are more pronounced. If the government, indeed, believes that growth slowdown is due to external headwinds, it should help in making the Reserve Bank of India’s balance sheet stronger than drawing heavily from it.