With
the elections behind it, the government has chosen to
unveil the promised second instalment of the economic
package that it claims will stimulate a slowing economy.
Given the global fashion these days, some media observers
have wrongly described this as the Centre's second ''fiscal
stimulus'' package. The package is not fiscal but more
monetary in nature, with little emphasis on increasing
government spending. Such an increase, in a context
when tax collections are expected to be short of targets,
would require additional deficit financing or credit-financed
spending by the centre. Very clearly, unlike governments
in many other countries in the world, the UPA in India
has not shed the fiscal conservatism that is the centrepiece
of its neoliberal economic ideology. It is reticent
to increase the fiscal deficit even in the current circumstances
of declining inflation and slowing growth.
In the event, the so-called stimulus package has three
major components. The first, is a set of measures to
be adopted by both the Reserve Bank of India and the
government that are aimed at reducing interest rates
and increasing the access to credit of firms, state
governments and individuals. The repo rate, or the rate
of interest on the borrowing by banks from the RBI,
has been reduced by one percentage point to 5.5 per
cent. In addition, banks are being encouraged to lend
to the private sector through a number of measures including:
a reduction in the Cash Reserve Ratio, or the cash balances
they need to hold, by half a percentage point to 5 per
cent of deposits; a reduction in the reverse repo rate
or the interest they can earn by lending to the RBI
rather than the public from 5 to 4 per cent; and a promised
recapitalisation of banks with a government contribution
of Rs. 20,000 crore over two years, so as to enhance
their credit delivery capacity. Banks are also to be
coaxed into lending with guarantees on loans to small
and micro enterprises, and higher credit targets.
It is not just domestic financial institutions that
domestic borrowers are expected to tap. Access to credit
from foreign sources has also been enhanced by : (i)
scrapping the interest rate ceiling on external commercial
borrowings (ECBs) made through the approval route; (ii)
allowing ECB for investment in commercial real estate
in the form of integrated townships; (iii) permitting
non-bank financial companies (NBFCs) dealing exclusively
with infrastructure financing to access ECBs; and (iv)
raising the ceiling on FII investment in rupee-denominated
corporate bonds from $6 billion to $15 billion. If domestic
credit is unavailable or expensive, ''borrow from abroad''
is the slogan.
The second set of measures incorporated in the package
aims to get state governments and the India Infrastructure
Finance Company Limited (IIFCL) to borrow to finance
capital, especially infrastructure, expenditure. State
governments would now be allowed to resort to additional
market borrowing of 0.5 per cent of the Gross State
Domestic Product or around Rs. 30,000 crore to finance
capital expenditure. In sum, while the centre is unwilling
to increase spending based on additional borrowing,
it is willing to let states take that route and present
it as part of a ''central package''. The other component
of public deficit-financed spending is to come from
the IIFCL, which, having been permitted to raise Rs.
10,000 crore through the issue of tax free bonds by
March 31, 2009, would now be allowed to raise an additional
Rs. 30,000 crore through similar bonds to finance infrastructure
projects.
Finally, a third component of the package is directed
at spurring the demand for automobiles. States are to
be provided assistance up to June 30, 2009 under the
JNNURM to buy buses for their urban transport systems.
Buyers of commercial vehicles between January and March
this year are being offered the benefit of accelerated
depreciation of 50 per cent. And banks are now allowed
to support NBFCs with credit for purchases of commercial
vehicles.
Put these measures together and what we have is an element
of compulsion on banks and financial institutions to
lend and an invitation to different economic actors
to borrow and spend. This includes borrowing in foreign
exchange to finance expenditures in areas like real
estate, which are unlikely to yield foreign currency
revenues that can be used to meet future repayment commitments.
This structure of the so called ''stimulus'' package
is shocking to say the least since it would only strengthen
the kind of tendencies that generated the crisis in
the developed countries in the first place. It is now
widely accepted that the financial and real crisis in
the US and other OECD countries occurred because of
an easy money and cheap credit regime introduced in
a world of deregulated and rapidly proliferating finance.
This provided the basis for a credit-financed housing
and consumption boom that was speculative in character
and was self-propelling till such time as defaults began.
That is, the speculative financial boom that went bust
was not an independent and isolated phenomenon, but
contributed to and drew sustenance from a debt-financed
real economy boom. As a result, even though the crisis
first appeared as a sub-prime housing loans problem,
it soon snowballed into a full-fledged financial crisis
that had severe recessionary implications for the real
economy.
Moreover, once the crisis occurred and needed to be
addressed, it became clear that merely pumping liquidity
into the system or reducing interest rates was inadequate
to get the economy going again. The end of the financial
boom was accompanied by a sharp contraction of private
sector demand on the one hand and the threat of insolvencies
on Wall Street and Main Street on the other. The government
therefore had to step in to both rescue failing firms
and and fuel demand directly. This made a fiscal stimulus
the focus of policy leading to the current revival of
Keynesianism in the US and parts of Europe.
Seen in the light of that experience, the stimulus package
that has been put in place over two phases in this country
implicitly presumes that India's case is different.
The problem here it is being suggested is indeed one
of inadequate liquidity, of costly credit and of an
unwillingness to lend. And it is being presumed that
efforts to address these issues directly would not put
India in a situation where it too would be using a speculative
bubble to drive a real economy recovery and paving the
way for a financial meltdown that would that would abort
or subvert that recovery.
There are, however, clear indications that such assumptions
are unwarranted. To start with, even if not as yet in
a debt-driven crisis, India is substantially dependent
on private credit to sustain growth. The so-called ''economic
reform'', which included both fiscal reform that limited
capital expenditure by the State and financial liberalisation
that refocused bank lending in favour of retail credit,
did transform the trajectory of growth. If earlier public
spending was the principal stimulus for growth, this
was substituted with debt-financed housing investment
and private consumption. This required a relaxation
of the terms on which and the volumes in which debt
was available to households and the private sector.
In the event, the share of retail credit in the total
advances of the banking system has increased substantially
and the direct and indirect exposure of the banks to
sensitive sectors like the stock market and real estate
has increased considerably. That is, India's recent
near nine percent growth rate was also fuelled by debt,
which has made this country's financial system vulnerable
to large scale default.
Yet, what the government is attempting now is to coax,
cajole and force banks into lending even more in the
hope that there would be enough borrowers who would
use that credit to revive flagging domestic demand and
make up for sluggish exports. The objective appears
to be to further inflate the embryonic credit bubble
to prevent growth from slipping sharply.
In the process it is not just the banks, households
and corporations that are being directed into a debt
spiral; so are the state governments, who have been
permitted an additional Rs. 30,000 crore of borrowing.
In a period when tax revenue collections are turning
sluggish, when resource devolution from the centre to
the states is biased in favour of the centre and when
an impending pay revision is likely to strain the states'
capacity, asking them to borrow and spend to help a
recovery even when the centre holds back is indeed bizarre.
What is needed is the transfer of more resources from
the centre to the states since spending is likely to
be quicker at the state level, helping stall the slump
and paving the way for recovery. But no such transfer
is forthcoming since the centre is holding back on its
spending.
The centre's reluctance to spend has also resulted in
a strange off-budget transaction in which it is willing
to forego tax revenues to help the IIFCL to mobilise
up to Rs. 40,000 crore that will then be used to leverage
and supplement private or public sector investment in
infrastructure. It is by no means definite that such
investment would be forthcoming in the midst of a down
turn. On the other hand there are obvious dangers of
adding to private debt exposure in this fashion. It
would have been far more advisable for the government
to undertake the expenditure and at least partly meet
it with the revenues that it would have garnered through
taxation when the recovery occurs.
Finally, as noted above, the package not merely relies
on infrastructural investment financed with domestic
debt, but encourages such spending financed with external
commercial borrowing. This not merely adds to the debt
spiral, but involves a currency mismatch inasmuch as
infrastructural projects are unlikely to yield foreign
exchange revenues that can be used to meet interest
and amortisation commitments payable in foreign exchange.
On the other hand, with global interest rates being
much lower than domestic rates, firms may not adequately
take account of exchange rate risks and opt for foreign
borrowing whenever available. This could lead to solvency
problems if the rupee depreciated sharply, and strain
India's foreign reserve position if the exodus of foreign
capital continues.
What does this reliance on private debt-financed spending
to trigger a recovery indicate? One of the lessons that
has come out of the global crisis is that if big financial
firms are lightly regulated and permitted to discount
risk when seeking profits, then it is likely that the
government would have to nationalize them because letting
them fail (as happened with Lehman Brothers and did
not with AIG) could have adverse systemic effects. The
implication was clear. Embracing deregulation and a
minimal role for the state by relying on debt-financed
private consumption and investment as part of a neoliberal
strategy leads up to a crisis-induced retreat from neoliberalism
in the form of nationalisation and state-financed bail
outs. Capitalism could possibly do better by discarding
neoliberalism and providing a role for the state many
conservative commentators began to argue. This is, however,
a lesson that is difficult to absorb to the UPA government
steeped in neoliberal ideology. And that together with
the fact that India's crisis is still in the making
possibly explains the bizarre form that India's official
''stimulus'' takes.
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