The Glacier Moves

I think I had read in the Economist once that "The Indian Government was like a glacier---you know it is moving, but you can never see it move". However, perhaps partly because this is election year, and given the seriousness of the issues, the governemnt has moved quickly and fairly effectively on a number of issues.


6th Pay Commission Anomalies
The Ministerial committee has made some welcome recommendations on the anomalies in relation to members of the Armed forces, vis-a-vis their civilian counterparts: Lt. Cols and equivalents have been moved to PB 4; the pensions of other ranks (Jawans) have also been rationalised; and it has been announced that the Armed Forces will have a separate pay commission from now onwards. Whether this will be of any use or not, is left to be seen. I would rather have more representation from the Armed Forces in the existing Pay Commission so that such anomalies do not creep up in the future. However, the government made no commitment on pay parity between the Armed Forces and their civilian counterparts for all grades between Lt and Brigadier and placement of Lieutenant Generals in Higher Administrative Grade Plus pay scales. The Armed Forces must remain under civilian control in a democracy, but they should definitely be paid the same at the same level of government. Few bureaucrats have to face bullets in another day at the office.

Economic Stimulus - "We are all Keynesians now"
As would be expected from a Prime Minister who was the chief architect of India's economic liberalisation in the early 1990s, and a Finance Minister who has presented a budget widely touted by the press as the 'Dream Budget', the government has taken both preventive and curative action to stave off, or at least reduce the effect of recessionary pressures looming over the economy. As Richard Nixon once said, "We are all Keynesians" now. Lord Keynes showed that in a pessimistic economic environment, where there is a 'crisis of confidence', monetary policies are less effective, as banks are less inclined to lend (there is enhanced risk aversion) and consumption-led demand falls as businesses fail, creating a self-reinforcing cycle of depression. The way out seems to be for governments to spend on creation of infrastructure and other real goods, thereby creating value and at the same time, providing a stimulus to domestic demand in by job creation.

A Difficult Time

This has been a difficult time. The USA, India's largest trading partner, is officially in recession and is seeing the largest number of job losses since 1945. Effectively, we are witnessing the biggest slowdown in the US economy since the Great Depression of 1929-33. The Credit markets have seized up and the great giants of Wall Street---the venerable big 4 investment banks, have either gone belly up (Lehman Brothers) , or sold out (Merrill Lynch, Bear Stearns) or copped out to become plain vanilla commercial banks (Morgan Stanley and Goldman Sachs), protected by the FDIC and the Fed. For the first time since WWII, Euroe and America are slowing down at the same time. India, with 35% of its economy dependent on external trade, can obviously not remain immune to this meltdown. There was contraction in our manufacturing growth for the first time since 1983---in October 2008.

The government and RBI have fired on all directions---both monetary and fiscal to prevent this crisis from getting worse. The RBI has coinsiderably loosened its monetary strings, with phased reductions in the cash reserve ratio---the CRR--- (from 9% in September 2008) to 5 % in January 2009. The repo rate at hich the RBI lends to banks, has been reduced to 5.5%, reducing the cost of funds, and the reverse repo rate which the RBI pays for deposits, has been reduced to 4%, again creating incentives for low interest loans by reducing the rate of risk free investments. It has been estimated each percentage cut in CRR releases about Rs. 40,000 Crore in the system. However, as the good ol' Lord (Keynes) had predicted, this is not necessarily leading to banks going out into the streets with sacks of money , asking people to borrow. A lot of banks have been parking the extra funds in government securities driving down the yield of the 10-year government bond to an all-time low of 4.86% . Yields and bond prices have an inverse relationship. So demand for these instruments was obviously quite manic.

To salvage this situation, the government has come out with strong fiscal measures in order to inject liquidity into the system and create jobs and demand. The corruption-ridden National Rural Employment Guarantee Scheme, which aims to provide 100 days of employment to BPL (below poverty level) families is, forever whatever it is worth, already on. Moreover, the government also announced a slightly cavalier Rs. 70,000 crore farm loan waiver scheme at the time of the last budget in 2008. However, on top of these measures, the government also unvelied two stimulus packages in December 2008 and January 2009. In December 2008, the government unveiled a package of measures worth about Rs. 30700 crore including across the board excise duty reductions and increased spending on infrastructure (Rs. 20,000 crore). In Jan 2009, a further suite of measures was announced: rates on external commercial borrowings (ECB) were decontrolled, Non-banking finance companies (NBFCs) were allowed access to ECBs for infrastructure projects and government controlled IIFCL was allowed to raise Rs. 30,000 crore in tax free bonds for infrastructure spending.

The glacier, finally, has moved. Now let's hope we get to see the fresh water flow in the form of additional liquidity and demand in the economy.