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View: GoI needs to focus on jobs and growth, not worry about ‘free lunches’

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On September 13-14, 2008, Morgan Stanley CEO John Mack was closeted with fellow bankers in the Federal Reserve Bank offices in New York. It was a crisis meeting to rescue Lehman Brothers, a troubled rival. Mack had every reason to feel confident about his own firm. Morgan Stanley had about $180 billion in liquid cash in bank, and was generally recognised as a superior investment bank that would weather the storm.

The next weekend, as US treasury secretary Hank Paulson and his team scrambled to put out multiple fires well after Lehman’s collapse, Mack sat down with senior executives in yet another crisis meeting.

This time it was about saving his own tottering, bleeding firm. The $180 billion was disappearing fast, and Morgan Stanley had days, if not hours, to find a white knight, or it would go under like Lehman. And if Morgan fell, Goldman Sachs would be next. As Paulson battled severe odds, the fate of Wall Street’s biggest and brightest hung by a slender thread.

Financial market storms rarely discriminate between big and small. They also don’t take kindly to footdraggers.

As global governments behave like kamdhenus in the face of the Covid-instigated economic battering, could India’s delayed economic response to the pandemic be excused on the basis of the health impact on its population? Given the low rate of infection and deaths, is it possible to delay the fiscal stimulus till things are clearer about the damage? No.

As GoI bureaucrats and ministers wade through yet another interminable meeting, lakhs of workers, entrepreneurs and businessmen are on the ropes. Much like the Morgan executives who spent that September 2008 weekend chewing through their fingernails not knowing whether the firm will survive or not, these businessmen, too, are staring into a deep abyss. Their money is running out, factories and production units are shut. Will GoI do anything for them?

A Rope, Not a Snake

Four major problems have so far characterised GoI’s fiscal response: incrementalism, over-reliance on bankers, undue fear of macro problems, and fear of optics over helping the well-off. All these feed off the other.

For instance, fear of higher fiscal deficit, or of credit rating agencies, is pushing GoI to rely on bankers to provide liquidity and loans.

This is creating its own set of problems. The same fear is also driving the approach to small and medium business credit like partial guarantees.

Even as you read this, bankers and GoI are locked in talks over the extent of government guarantee to small businesses. Bankers want near 100%, but GoI is unsure.

Relying on banks to pump-prime the economy is not going to help. As part and parcel of our free market system, their first responsibility is to shareholders and depositors and to protect their balance sheets. Banks have every right to be selective in lending and should not bow blindly to government diktats on lending without ensuring some safety on their loans. Incrementalism is fine when you-’re dealing with a mild slowdown.

This is no mild slowdown. The right time to give relief is when companies are still standing, not when they are down and out. ‘There are no atheists in a foxhole, no ideologues in a financial crisis’, former US Fed chairperson Ben Bernanke famously said during the 2008-09 global financial crisis.

The Narendra Modi government’s economic policy team is not composed of ideologues. But one would criticise them for not having a collective, economic mind of their own.

The charge that they are swayed by everybody who comes to them with an idea, and are mortally scared of doing anything that appears to benefit the rich, rings true too often. Also, the perception that GoI is worried about upsetting credit rating agencies and global forex markets seems to stick.

Mark Zuckerberg and Stephen Schwarzman don’t look at credit ratings when they invest in India. GoI doesn’t borrow abroad. So, should it focus on higher costs for big companies who do? Worrying about higher inflation and interest rates when credit growth has collapsed and demand is tepid is the opposite of sound economic thinking.

So is worrying about whether the rich will benefit or take advantage of the stimulus. Should GoI not save the airlines and entertainment sectors just because they are dominated by an N Chandrasekaran of the Tata Group and an Ajay Bijli of PVR? Every major economic and financial crisis since the 1929 Great Depression has been solved by massive government intervention and spending.

This time, the pandemic at the heart of the economic rout may likely cause more behavioural changes that will crimp business and consumer activity for a long time. All the more reason for GoI to open its purses and let the money talk.

Of the Wood & the Trees

The Modi administration should be bold without being reckless, generous without appearing to be spendthrift.

This week, chief economic adviser K V Subramanian told this paper (bit.ly/3dqaO4r) that there are no ‘free lunches’, and even deficit monetisation bears a cost. In worrying about cost, GoI shouldn’t lose sight of incomes, growth and prosperity. If you think too much about the long term, you may end up irreparably damaging what you have now.

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Written by sortiwa

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