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Bonds, bondage and bullies

Sukumar Muralidharan | Updated on January 24, 2018

The song and dance of democracy: Members of a band at the opening day of theBudget Session, which collapsed in acrimony soon after, when the land ordinance was introduced. Photo: Kamal Narang

Sukumar Muralidharan   -  BUSINESS LINE

In this catechism of the new economics of growth, a number of basics are being missed. India’s vast rural expanse is today in the throes of acute demand deficiency

A political adviser to former US President Bill Clinton said that if there is an after-life, he would like to be reborn as the bond market. It beat being a champion athlete, a rockstar or even the world’s richest man. The bond market could bully just about everybody.

As Parliament begins its budget session, Reserve Bank of India (RBI) Governor Raghuram Rajan finds the wild gyrations of international currency and bond markets a big worry. Major world currencies are softening as easy money policies have become the norm in economies seeking release from long months of recessionary gloom. Correspondingly, the rupee has been gaining in a manner that could impair India’s export competitiveness.

In his latest policy statement, the RBI Governor spoke of the latitude gained by shifts in the global economy. The decline in the price of oil had created ‘headroom’ for a fiscal stimulus with less risk of inflation. And then came the caveats. Speaking to The New York Times, Rajan wondered if the sudden collapse of the global oil price — its virtual halving within weeks — was evidence of a deeper vein of turmoil yet to be tamed: “I was talking to some market participants, and they were extremely worried about the extent of volatility that can emerge in markets in a very short run... I mean, (oil) is a very deep market. And virtually overnight, in a span of a month or two, it has gone from $100 a barrel to $50.”

Rajan undoubtedly has memories of at least two recent instances when events from afar have battered Indian markets and forced some form of submission. And these episodes have alternated with phases of buoyancy, typically attendant on some move involving Narendra Modi’s ascent to power.

After a five-year-long honeymoon with Manmohan Singh, the markets distinctly soured on him early in his second term. Since Modi’s prospective candidacy became an active topic of conversation, the markets cheered on each move that took him along that trajectory.

April 2013 was Modi’s grand coming out, when he flew to Delhi for a media event at which he spelt out a range of business-friendly policies and won the resounding endorsement of the industry lobbies. The stock markets were exuberant at the arrival of the new saviour. Soon afterwards came the catastrophic fall of May, precipitated in the main by an announcement from the US Federal Reserve (Fed) that it would rethink its quantitative easing policy, which had pumped dollars liberally into the economy, enabling Wall Street to play the world’s markets. There was a partial rally in July in the Indian markets and an end to the indecision in September, when the Fed signalled its intent to continue bond purchases, ensuring that a world awash in dollars would not have to search for a rapid cure to its addiction.

In between came a particularly telling episode. Under pressure for a crowd-pleasing measure prior to national elections, the Manmohan Singh government through presidential ordinance in July 2013, made food security a basic entitlement for every Indian citizen. The markets went into a swoon at once and the rupee plunged to a new low. The BJP supported the legislation as a matter of political convenience, but Arun Shourie, a prominent party ideologue who oversaw public sector disinvestment as a minister in the AB Vajpayee cabinet, called for scrapping the food security bill.

Since taking the helm at the RBI in September 2013, Rajan has seemingly made building a war-chest to deal with future volatility a priority. Foreign exchange reserves have, under his watch, gone up by about $60 billion and today stand at $322 billion. Yet, there is no way of judging if this volume is adequate to deal with the disappointment that will inevitably follow in bond markets as the budget session progresses. Neither can the implications be factored in, of the likely withdrawal of quantitative easing by the Fed as the US economy regains some buoyancy.

Leading into the budget session, The Economist — the trusted voice of the money-changers in the city of London — ran yet another cover story on India, using the old metaphor that tires but never dies: the elephant seeking to take flight. Its editorial prescription was simple and clear: to restore momentum to its flagging growth prospects, India needed to change policy on land, labour and power.

Leaving power aside, since nothing is possible in this domain without the other two; land and labour are precisely the areas where political concord has rapidly evaporated since Modi took office. After the solemnity of the opening day, the budget session collapsed in acrimony when the government introduced the ordinance it had issued to amend vital clauses of the law on land acquisition.

‘Reform’ could mean several things. But to characterise as a reform a legislative change that abridges the need for informed consent in large-scale land appropriations, while also doing away with social impact assessment, clearly challenges common sense.

In this catechism of the new economics of growth, a number of basics are being missed. India’s vast rural expanse is today in the throes of acute demand deficiency. The 2014 monsoon was below par, and cutbacks in spending under the rural employment programme, imposed since the Modi government took office, have caused further aggravation. When over 60 per cent of the country is taken out of the growth calculus, there are limits to what can be achieved — still less from legislating them out of the charmed circle of informed consent.

( Sukumar Muralidharan is a fellow at the Indian Institute of Advanced Study, Shimla)

Published on February 27, 2015

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