The copywriting skills of RBI Governor Shaktikanta Das

Outside the Eco-Chamber

The Reserve Bank of India (RBI) publishes a monthly bulletin. The March 2021 bulletin begins with the following in the first paragraph regarding the state of India’s economy: “There is a restless urgency in the air in India to resume high growth, with signs that the capex cycle is uncoiling and turning, and earnings results of corporates having beaten market expectations.”

This is the kind of fluff you expect copywriters at advertising agencies to write and not the folks at India’s central bank. One has no problem with the Reserve Bank resorting to fluff to make its communication more interesting and accessible at large. Nevertheless, what it says needs to be backed by data. And what the RBI is trying to say here isn’t really backed by data.

The World Bank has predicted that the Indian economy will grow by 12.5 per cent in 2021-22. Other financial institutions and think-tanks have made similar double-digit growth predictions. This is clearly good news, but it comes with a disclaimer.

The 12.5 per cent growth will come on the base of a huge economic contraction of perhaps 8-10 per cent, in 2020-21. In that sense, the size of the Indian economy in 2021-22 will be very similar to or a little bigger than that in 2019-20. We have lost two years of economic growth, like many other countries in the world.

Also, there has been some permanent economic destruction. As the Economic Survey released earlier this year had pointed out, even if the economy grows by 10 per cent in 2021-22 and by 6.5 per cent and 7 per cent, respectively, in 2022-23 and 2023-24, the size of the economy would still be at around 90 per cent of where it would have been without the pandemic.

The RBI’s bulletin further talks about the capex cycle turning. This basically means that corporates are borrowing and expanding, building more industry and infrastructure. But the data does not bear this out. Data from the Centre for Monitoring Indian Economy points out that the total new investments announced (in value terms) fell by 70.5 per cent in 2020-21. Of course, 2020-21 was the year in which the covid pandemic impacted the economy negatively.

So, let’s look at investment data for 2019-20. The total new investments announced in 2019-20 were lower than the new investments announced in each of the years between 2006-7 and 2011-12. That’s how far investments have fallen in the last decade.

This can also be gauged by the fact that total lending to industry by banks stood at Rs 27.86 lakh crore as of February 2021, the latest data available. It had stood at Rs 27.45 lakh crore as of February 2016, five years back. The interest rate on fresh rupee loans given by banks during the same period has fallen from 10.54 per cent to 8.19 per cent, a fall of 235 basis points. One basis point is one-hundredth of a percentage.

Clearly, bank lending to industry has barely moved up over a period of five years. There could be two reasons for it. The reluctance of banks to lend and the reluctance of corporates to borrow, because they are not confident enough about India’s economic future. Hence, they do not want to take on new loans. Corporates take on loans when they are confident that the returns that they will earn from the business that they build by taking on new loans will be more than the interest that they need to pay on the loans.

The RBI’s bulletin also talks about high corporate profits. As Mahesh Vyas of the Centre for Monitoring of Indian Economy pointed out in a recent piece: “In the December 2020 quarter, the net profit of listed companies exceeded…the record profits of September 2020.”

How did this happen? The net sales of these companies fell by 10.4 per cent in the quarter ending September and by 0.9 per cent in the quarter ending December, in comparison to a year earlier, but the companies still made record profits. This happened primarily because the companies were able to drive down their operating expenses.

In the quarter ending March 2020, the operating expenses made up 91.1 per cent of their sales. In the quarters ending September 2020 and December 2020, the operating expenses amounted to 81.4 per cent and 82.8 per cent of the sales, respectively.

In simple English, the companies slashed employee expenses and renegotiated their contracts with their suppliers and contractors. The larger businesses benefitted in the process, at the cost of the smaller ones.

Of course, if a small company gets paid a lower amount of money from a large company, it also has to renegotiate the money it pays to its employees and suppliers. This is not good news for the economy, something that RBI’s monthly bulletin should have pointed out, but didn’t.

While the RBI Governor cannot be held responsible for every word that the central bank puts out, nevertheless, he should at least be aware of what the first paragraph of the lead article of RBI’s monthly bulletin, is saying. That he may not have known what is being written is not a good enough excuse. As the head of the institution, he should have known. In legal terms, at the very least, this is willful blindness.

As the country’s central bank, it is expected that the RBI brings out the right state of the economy in the commentary and analyses that it puts out. But that doesn’t seem to be happening. Copywriting skills seem to have taken over.