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| Recession and monetary policy | | |
Prem Shankar Jha
The RBI has not learnt that, in this slowdown India's national policies cannot be out of step with those of its partners.
Those who watch the statements of our policy makers closely may have noticed that a slight impatience with the Reserve Bank has crept into the utterances of our acting finance minister, Pranab Mukherjee, and the deputy chief of the planning commission, Montek Singh Ahluwalia, on matters of economic policy. In recent days both have made explicit public statements that there is now more than ample room for the RBI to cut its lending rates and the cash reserve ratio sharply in order to bring interest rates down and halt the slide into recession.
The RBI Governor, Doraiswamy has not demurred. But he hasn’t brought down either of the rates either. It is clear that beneath the polite references to each other, the two institutions are engaged in a turf war, in which the Centre is asking the RBI to do far more to check the slide into recession, and the RBI is telling Delhi, that monetary policy is none of its business, and should be left to the professionals at the Bank.
In normal times it would be hard not to agree with the RBI in principle, even if one disagreed with it on specific policies. For once the government starts to call the shots the politicisation of these, the most sensitive of economic decisions, is virtually unavoidable. But we are not passing through normal times. The present recession fully merits the use of that much overused hyperbole ‘unprecedented.’
This is not just an Indian recession; it is not even a worldwide recession; it is the first global recession in human history. The difference between it and the great depression of the 1930s is that while that began in the US economy and spread to others through a protectionist trade war, the current recession is a single downturn that is taking place in a single economy that just happens no longer to be confined to one country but is spread over the world.
This is why, in sharp contrast to the thirties, no leader is seriously contemplating the use of protection to stimulate their economy. They know that it would be futile. The recession to which the IMF had attached only a 25 per cent probability rating in April last year, has become a reality. The US, the EU and Japan are all in the throes of recession even by the ultra-severe yardstick of ‘negative growth in two successive quarters.’
However, these lifeless figures do not capture the tragedy that is unfolding around us. The real victims of the onrushing recession are not the advanced nations; not even the pensioners in them who have seen their pension funds shrink like deflated balloons in the past six months; but the workers in advanced and developing counties alike, who are being thrown out of work and losing their livelihoods. The US had lost 3.6 million jobs by the end of January. But this is dwarfed by the prediction of the ILO, which has predicted in its annual publication, Global Employment Trends, that 18 to 50 million workers will lose their jobs in 2009 alone and 200 million workers are likely to be thrown into extreme poverty.
Most of these job losses are taking place in the developing and newly industrialised countries, which were the prime beneficiaries of globalisation till the other day. The Chinese government is bracing itself for the worst.
A survey carried out by the Indian labour ministry in January has shown that 500,000 people have lost their jobs in just three months in 11 sectors of the economy that account for two-thirds of the GDP. This amounts to a rise in unemployment in these sectors of 3 per cent. But this is only just the beginning.
Order books are now very lean, especially for some products, like steel, chemicals, and iron ore which were going mainly to China. The gems, garments and leather industries are laying off workers in the tens of thousands. The Federation of Indian Export Industries has therefore warned that ten million jobs are likely to be lost in the coming months.
In the past three months, the OECD governments have slashed their lending rates, in some cases close to zero and have begun ambitious programmes for revivial spending. China is leading the way with a promise to spend $ 580 billion on infrastructure and income support during the next two years. But India remains the lone standout. Far from stimulating consumption, the government has deferred the payout of Rs 16,500 crore of salary adjustment arrears that was scheduled for this year till after August.
Judging from his recent statements, Doraiswamy fully recognises the seriousness of the global recession. But he does not seem to have grasped that in this new type of downturn India’s national policies cannot be too far out of step with those of its major trading partners. One has only to compare India’s borrowing rates with those of the major OECD countries to see how far out of step we have become.
Thus while the prime lending rate on February 18 was 3.25 per cent in the US, 1.88 per cent in Japan, 3.75 per cent in Germany and 5 per cent in Britain, it was above 12 per cent in India. The 15 year fixed mortgage rate in the US is down to 4.81 per cent. In India housing loans still attract a 12 per cent rate of interest, and the net rate for consumer durables is still above 11 per cent.
What is most tell-tale is the reason why he has concurred with New Delhi that interest rates can be brought down further. The room for reducing rates has been created, he concedes, by the decline in inflation to below 4 per cent.
In other words, while the rest of the world is fighting recession the RBI is still giving priority to containing inflation. When one wonders, will the RBI learn that just as the inflation of 2007 and 2008 was the product of a global boom, the steep drop in it is the product of global recession. Neither is amenable to control through domestic monetary policy. Even though it virtually killed investment in 2007, the RBI could not control the price rise. Today it cannot claim credit for the price fall.
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