The Hindu Business Line : Of economists & thinking cardboard boxes

In a corner of the dim morning sky, a half-dressed moon and an out-of-bed sun were having their first cup of tea. On New Link Road, offering a ropeway out of living for human beings run down by speeding Indicas and Toyotas, men and women with ear plugs are into their morning walks.

There are no parks where one can walk in peace; the one near St. Anne’s School on L.T. Road blasts the morning air with bhajans and film music. In extended Mumbai, New Link Road is the worst built (it is under a continuous process of being dug up and relaid) stretch of motorable road and the private contractor should have made a few crores doing a bad job.

Now, the municipal corporation has started digging the well-laid road ringing LIC Colony, and recently one saw a small black and white poster announcing: 30 trees to be knocked down.

All our government economists in New Delhi have decided to improve infrastructure and provide jobs to the poor, who in turn (they hope) will buy shares on the Bombay Stock Exchange and National Stock Exchange and urge up the Sensex.

It is a pardonable slip that our air-conditioned economists are unaware that the men and women who work on roads live on wheat costing Rs 20 a kg, potatoes at Rs 12 a kg, onions at Rs 14 a kg and green chillies at Rs 5 per 100 gm. Their children work free on the roads despite a vapid law banning child labour.

My friend Tariq Engineer once remarked, “You give the poor jobs and their children will not work. A law banning child labour will only keep the poor kids more hungry.”

“But then inflation is stable,” claims our official manning the finance ministry. It does not hurt the officer if inflation is 10 per cent or 100 per cent; if it becomes too uncomfortable, the official will wangle a dollar job in IMF or World Bank to write a book on poverty and social revolt and await a Nobel Prize for Economics.

On TV channels and newspapers, officials tell you: “Inflation will drop to 7 per cent by March 2009 and there will be at least 8.5 per cent GDP growth.” See the indices; they forget that the re-worked indices are always higher than the first estimates.

The Finance Minister P. Chidambaram can be seen pleading for calm. “Calm will return,” he says like some rishi of yore. To keep the Sensex up, the government brought forward the announcement of the rate of inflation on Thursday though initially it was said the inflation rate would be made public late in the evening or at least after market hours on Thursday.

And now, the Sensex boosting news of Raghuram Rajan, an economist at the University of Chicago, becoming an honorary economic adviser at the PMO.

This government has at best four or five months to go (unless the Congress party decides to scrap General Elections) and one cannot understand the logic behind the appointment of Rajan.

For more than four-and-a-half years, the government did nothing to pull itself out from oil companies and banks.

The finance ministry has two advisers – Shubhashish Ganguly and Jahangir Aziz — brought in from outside, says an edit in Indian Express and concludes: “Flexibility, heterodoxy and thinking out of the box – that’s what crises need.” The advisors are all honourable men. But there is a niggle.

Indian economists and bankers have long said what Rajan has become famous for. Starting from the Narasimham Committee Report, there are enough studies on the shelves of RBI and the Finance Ministry, arguing for changes in the financial sector.

They had all favoured pulling out the banking system from the tangle of the Finance Ministry. Dr. Bimal Jalan as RBI governor, had favoured a critical 30 per cent government stake with the rest in private hands.

In the last five years, New Delhi has used the oil companies and the banking system to run its agenda, with the latest being to get banks lend cheaply to mutual funds and a few industry lobbies and get the Sensex topping the 21,000- mark.

After becoming Prime Minister Dr Manmohan Singh told the country on May 2004 that there will be no privatisation of public sector banks.

Two financial scams in the last few years originated in government-owned financial institutions — Harshad Mehta in SBI, Ketan Parekh in UTI and one — the CRB scam — in the private sector — despite RBI and SEBI. So what out-of-box thinking (the latest cliché) will Rajan do? There are enough advisors and as many thinking, cardboard boxes in New Delhi.

On October 29, the RBI kept interest rates unchanged; the Sensex dipped; within a week interest rates were trimmed and business papers are happy the Sensex has crossed the 10,000-mark.

Till a year ago, business papers often discussed the idea of a super-regulator for the financial system.

Pallaniappan Chidambaram is the first super-regulator. He is the RBI. He is the SEBI. He is the IRDA. He is the Pension Regulator. He is the Indian economy as He alone understands the Indian economy. The rest are loose change, know nothings.

Chidambaram can argue, without being challenged, that all these regulatory institutions come under the Finance Ministry.

Then why climb over these bodies if they disagree with the Minister or decide to go by their governing statutes? It is too well known (though officially denied) that the previous RBI Governor, Dr. Yaga Venugopal Reddy differed with Chidambaram.

For Dr. Reddy price control was the first and last point (sensibly too) of worry at the RBI.

Before the global financial crisis, the government floated the idea of taking out $5 billion from the forex reserves to be placed in a Special Purpose Vehicle to fund infrastructure. It was said the fund to earn profits would be invested in global papers of sufficient credit quality. The RBI did not warm up to the idea and thanks be to RBI. Today, the $5-billion would have been scrap for the raddiwala. These are the out-of box ideas our officials in New Delhi revel in.

A non-descript idea of getting banks to lend to agriculture or small scale enterprises, is dismissed with a wry smile.

If the Prime Lending Rate of banks, after all the forced cuts, is 13.5 per cent, Indian farmers will get funds at well over 14 per cent as they have insufficient collateral and are not credit rated.

Bankers have forgotten to lend — their prime job. They await instructions from the Finance Ministry. The Prime Minister does not want lay offs.

When the notorious building lobby in Mumbai stops ordering for bricks and sand, construction workers (the most vulnerable in the urban income scale) lose jobs. That is happening.

They are daily wage workers and will have to starve or go to Bihar or U.P., from where they come, and starve.

In getting the banking system to pander to the broking community, the Indian economy is crawling towards a fiscal crisis (it is all outside the books) and the new government in April will have to raise taxes to hurt the poor most. It is not banking practice to lather private enterprise with public money.

Last read was a report mentioning a move by the broking community to approach the Government for funds to square their losses.

It cannot turn more grotesque. Wonder who is being protected: The poor or the political class which has invested in shares?

P. Devarajan

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Of economists & thinking cardboard boxes